The Supreme Court has handed down a significant judgment in HMRC v HFFX LLP [2026] UKSC 17, resolving a long-running dispute over the tax treatment of deferred remuneration arrangements used by partners of a foreign exchange trading LLP. The case turned on an elaborate profit-sharing structure known as a Capital Allocation Plan (CAP), under which around half of each individual partner’s annual profit entitlement was redirected to a Cayman Islands corporate member (GSAM) rather than paid directly to them. GSAM invested the funds, paid corporation tax at the lower corporate rate, and then over three years transferred the proceeds back to individual partners as ‘Special Capital’. The intended effect was to shelter the deferred element from the much higher rates of income tax that would otherwise apply. It was common ground that tax avoidance was one of the main objects of the arrangement, though the plan also served a genuine commercial purpose of retaining and incentivising staff.
HMRC’s primary argument was that the amounts allocated to GSAM should be treated as income of the individual partners for the relevant tax year under section 850 of ITTOIA 2005, which governs how partnership profits are shared among partners. The Supreme Court in a unanimous judgment delivered by Lord Sales dismissed this argument. Section 850 operates by reference to the contractual rights of partners as they exist during the period of account: only profits to which an individual partner has a vested contractual entitlement in that period are attributed to them. Because individual partners had no such right over the amounts allocated to GSAM (whose discretion, though subject to rationality constraints, was genuine), those amounts could not simultaneously be treated as the individuals’ income. The court firmly rejected HMRC’s attempt to invoke a broader purposive reading, confirming that tax law follows and respects genuine contractual arrangements between partners and that if Parliament views such structures as objectionable, the remedy is legislation, not judicial reinterpretation.
However, the individual partners fared no better on the question of what happened when the deferred payments were actually received. The Supreme Court dismissed their appeal on section 687 of ITTOIA 2005, the residual income tax charge on income ‘from any source not otherwise charged’. The partners argued that the payments had no taxable ‘source’ because they held no enforceable legal right to any specific sum: GSAM’s discretion was, on the face of the LLP Deed, absolute. The court disagreed. Drawing on long-established authority including Cunard’s Trustees [1946] and Drummond v Collins [1915], Lord Sales confirmed that section 687 is a broad sweep-up provision that does not require the income’s source to be something the recipient actually possesses, nor does it demand a full legal obligation to pay. What matters is whether a sufficient legal nexus exists between the payments and the recipient. Here, that nexus was provided by the combination of the contractual framework in the LLP Deed, the rationality obligations that governed GSAM’s discretion, and the actual exercise of that discretion in each partner’s favour. The deferred payments were therefore fully chargeable to income tax in the year of receipt, meaning that the profits in question were, in effect, taxed twice: first as corporate income in GSAM’s hands, and again as income in the hands of the individual partners.
The judgment carries several important lessons for tax practitioners and partners in LLPs. First, it firmly settles the law on section 850 in line with the Court of Appeal’s earlier decision in BlueCrest CA [2024] STC 92, confirming that genuine corporate partner allocations under a partnership deed will not be reattributed to individuals. Second, it confirms that section 687 is cast wide enough to catch deferred remuneration received pursuant to a discretionary scheme where the recipient has rights under a binding legal framework even in the absence of a strict entitlement to a particular sum. Third, the court expressly declined to rule on whether the ‘sales of occupation income’ regime in Chapter 4, Part 13 of ITA 2007 could have applied as a further charging provision, leaving that issue unresolved for a future case. Finally, the decision reinforces that purposive statutory interpretation cannot be used to stretch the language of a tax provision beyond its natural meaning simply because HMRC considers the commercial outcome undesirable.
If you or your clients have participated in deferred partnership remuneration arrangements of this kind, whether under a CAP, a partner incentivisation plan, or a similar structure — and have questions about your income tax position or face an open HMRC enquiry, W Legal’s specialist tax litigation team would be pleased to hear from you. We advise across the full range of tax disputes from HMRC enquiry through to the Supreme Court.
