Atkins and HFFX LLP: the limits of purposive construction and the reach of the miscellaneous income charge

Case: Commissioners for His Majesty’s Revenue and Customs v HFFX LLP; Atkins and others v Commissioners for His Majesty’s Revenue and Customs [2026] UKSC 17

Court: Supreme Court (Lord Lloyd-Jones, Lord Sales, Lord Hamblen, Lord Burrows, Lady Rose). Judgment delivered by Lord Sales.

On appeal from: [2024] EWCA Civ 813

This is one of a cluster of cases testing whether deferred remuneration arrangements operated through a corporate member of an LLP could shelter trading profits from income tax. The Supreme Court delivered a clean, two-part result: HMRC lost on the front-loaded charge but won on the back-end charge.

The practical headline is that both appeals were dismissed. The court dismissed HMRC’s appeal in relation to section 850 of ITTOIA and dismissed the appeal of the individual members in relation to section 687 of ITTOIA. The net effect is that the deferred sums escaped immediate taxation as partnership profit shares but were caught on receipt as miscellaneous income.

For practitioners the judgment matters less for its outcome on these (historic) facts than for two points of general principle it settles: the proper construction of section 850 ITTOIA and the limits of the purposive/Ramsay (WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300) approach to charging provisions; and the breadth of the “source” requirement in the residual charge under section 687 ITTOIA.

The facts in brief

HFFX was a forex trading LLP within the GSA group, led by Mr Alexander Gerko as Managing Member. HFFX sought to devise a method to distribute its profits to its members in a way which minimised the tax which would be imposed, involving a mechanism to pay them deferred remuneration in later tax years; the question was whether that mechanism was effective.

The mechanism was the Capital Allocation Plan (“the CAP”). Its dual character was important to the analysis. As found as a fact by the tribunals below, the CAP had as one of its main objects the avoidance or reduction of liability to tax; this was not contested on the appeal. In addition, the CAP had commercial purposes, including in particular the retention and incentivisation of individual members of HFFX.

Mechanically, the structure worked as follows. GSAM followed the recommendations it received from Mr Gerko: it would pay corporation tax and running expenses out of its profit allocation, then invest the net amount in shares in GSA funds and proceed to reallocate. Roughly 50% of the excess over the first £100,000 of each individual member’s Pre-Retention Amount was allocated to GSAM, which sold the fund shares over three annual tranches and contributed the net proceeds back to HFFX as “Special Capital” before reallocating to the individuals.

The crucial discretionary feature was that a member who left HFFX as a “bad leaver” would lose his entitlement to receive the deferred remuneration to which he was otherwise entitled under the CAP; hence the operation of the CAP gave members an incentive to remain with HFFX and to adhere to the terms of their contract. The intended fiscal effect was that the profits allocated to GSAM would be taxed at the much lower rate which applied for corporation tax, as compared with the significantly greater tax charge to which the individual members might be subject if they received their share as part of their taxable income subject to the higher rate of income tax.

A point that became common ground, and which proved decisive on section 687, was the legal nature of GSAM’s discretion. GSAM’s discretion (and any discretion Mr Gerko had to make recommendations) was not unfettered, but was limited according to the Braganza obligations. That meant GSAM had to exercise its discretion rationally and for the purposes for which it was conferred.

Issue 1: Section 850 ITTOIA – and the limits of purposive construction

What was in dispute

HMRC’s primary case was that the profits routed to GSAM should be treated, for income tax purposes, as the individual members’ profit shares in the year of allocation. The question, as the court framed it, was whether the profit shares that were allocated to GSAM are to be regarded as the individual members’ profit shares in accordance with HFFX’s “profit-sharing arrangements” under section 850 of ITTOIA. HMRC expressly invited the court to overrule the reasoning in BlueCrest CA (Dodd v Revenue and Customs Comrs (Revenue and Customs Comrs v BlueCrest Capital Management LP) [2023] EWCA Civ 1481; [2024] STC 92).

In the Supreme Court, HMRC’s case was framed as one of statutory purpose and commercial reality, rather than as a case that the CAP was a sham or lacked commercial purpose. HMRC said that consideration of the context and purpose of section 850 indicated that the Court of Appeal erred in BlueCrest CA, where Sir Launcelot Henderson had relied on the ordinary meaning of the words used, read in context. HMRC’s submission therefore gave rise to an issue regarding the relationship between the ordinary meaning of words used in a statutory provision and the general purpose which might be taken to underlie it.

What the court decided – and why

The court held that section 850 requires a contractual right, subsisting in the relevant period of account, to share in the profits. Lord Sales reasoned that the provision presupposes a definitive, knowable allocation: it is implicit that it must be possible to tell from the profit-sharing arrangements in place in the firm in that period whether any part of the profit or loss of the firm’s trading in that period is definitively attributable to the individual and if so in what amount; this means the arrangements have to include a contractual right for the partner to receive (or suffer) the part of the firm’s profit (or loss) treated as his or her income in that period.

Two features of the reasoning are worth flagging for practitioners.

(1) The “during that period” point and the 1890 Act backdrop. The temporal element is doing real work. The court accepted that the rights must exist within the period of account, so that an allocation of profit shares in accordance with an agreement made after the end of the period is not relevant for income tax purposes. The court located section 850 within the general “look-through” scheme of partnership taxation, observing that there is no provision under the regime for later adjustment of the shares of partners of profits and losses as a departure from their rights arising in the period; the entirety of the partnership’s trading profits has to be allocated between the partners in the relevant period, and not at any future date.

(2) The rejection of the “commercial reality” argument. This is the doctrinally significant part. HMRC argued, relying on Rossendale BC v Hurstwood Properties, that the object and purpose of section 850 was that members should be taxed in accordance with the division of profits as a matter of commercial reality. Lord Sales rejected this as pitched at too high a level of abstraction. He approved Sir Launcelot Henderson’s reasoning in BlueCrest CA that, while the concept of a “right” is not in principle immune from a Ramsay approach, any wider approach could only be justified if the statutory purpose of the relevant provision can be safely identified and the wider meaning, when realistically applied to the facts, is needed to prevent the frustration of Parliament’s intention in enacting it.

That condition was not met. Critically, the CAP was genuine: the CAP arrangement, like the PIP in BlueCrest CA, had a valid commercial purpose; unlike in Ramsay, there was no part of its operation which did not share in that purpose, so as to justify ignoring it. The purpose of the statutory regime is to be determined primarily by reference to the language used by Parliament, read in context – to impose taxation on the “look-through” basis and in accordance with the contractual rights of the partners (including GSAM) applicable in the relevant period.

The court was unimpressed by the structural oddity HMRC’s own position created – namely that GSAM would escape corporation tax if HMRC succeeded. Lord Sales endorsed Sir Launcelot Henderson’s observation that rates of income tax and corporation tax are set by Parliament, and if a partnership arranges its affairs so that a substantial proportion of its profits is payable to a corporate partner, and the arrangement is genuine and has a real commercial purpose, HMRC cannot complain and their remedy, if the arrangements are considered objectionable, is to procure a change in the law.

The conclusion is stated in uncompromising terms: Mr Baldry’s appeal to the general object and purpose of section 850 is pitched at a level which is too general and abstract, and is untethered from the language used by Parliament to impose the tax charge.

What has changed

In strict doctrinal terms, section 850 itself is unchanged – but the Supreme Court has now authoritatively settled its construction at the apex level, in line with BlueCrest CA. The points that are now binding:

• A contractual entitlement subsisting in the period of account is required. A mere expectation of a later discretionary award, however predictable in practice, is not a “right” to share in profits for the purposes of section 850.
• A genuine allocation to a corporate member is respected. Where the corporate member’s discretion is real and the arrangement has genuine commercial purpose, the allocation cannot be simultaneously re-characterised as a slice of the individuals’ profit.
• The Ramsay/purposive route was not made out on facts of this kind – but it is not closed in principle. The court was explicit that the statutory concept of a “right” is not in principle immune from a Ramsay approach; a wider meaning could be available, but only where the statutory purpose can be safely identified and the wider meaning is needed to prevent the frustration of Parliament’s intention. That threshold was not met here because the structure was genuine and commercially purposed. The case is thus a significant marker on the limits of purposive construction: purpose is derived from the statutory language read in context, and a free-floating appeal to “commercial reality” will not override a clear textual meaning where the structure is not artificial.

Issue 2: Section 687 ITTOIA – the breadth of the “source” requirement

The narrow question

By the time the case reached the Supreme Court the issue had narrowed considerably. In the present case, the individual members accept that the deferred sums paid under the CAP arrangements constitute “income”, and the only issue is whether there is a relevant “source”. It was also common ground that the payments were not purely voluntary, since they were paid pursuant to the exercise of a contractual discretionary power governed by the Braganza principles.

The members’ argument was essentially that a “source” must be something possessed by the recipient, and that GSAM’s discretion – absolute on the face of the LLP Deed – gave them nothing they could point to as a source.

The court’s approach to section 687

Lord Sales first emphasised the provision’s lineage and the interpretive consequence. Section 687 formed part of the Tax Law Rewrite Project and was designed to replace the residual charge to income tax previously contained in Case VI of Schedule D. Because of that, it was common ground that section 687(1) was intended by Parliament to have the same scope as the earlier legislation, and that the authorities relating to Case VI of Schedule D remain relevant to its interpretation. The court applied the Farrell v Alexander [1977] AC 59 / R (Derry) v Revenue and Customs Comrs [2019] UKSC 19; [2019] STC 926 (paras 7–10) presumption that, in cases of significant ambiguity, the meaning of the antecedent legislation is not changed.

The decisive move was to align the “source” question with the “voluntariness” question through the old authorities – chiefly Cunard’s Trustees v Inland Revenue Comrs [1946] 1 All ER 159; (1945) 27 TC 122 and Drummond v Collins (1915) 6 TC 525, 540; [1915] AC 1011. From Cunard’s Trustees, Lord Sales drew the proposition that it is entirely natural to regard the exercise of a discretion framed by a legal instrument to pay a sum as income as a “source” for the purpose of the tax regime.

He then articulated the operative test: whilst it is not necessary to decide whether “income” for tax purposes always necessarily has a relevant “source”, it will usually be the case that it does. Absent some special factor bearing on the legal analysis, where there is an identifiable reason, framed by powers and obligations arising from a legal instrument, for a payment of income to be made, that is properly to be identified as the relevant “source” of the payment so as to satisfy the requirement in section 687.

Applied to the facts, the inference of a source was, if anything, stronger than in the authorities. The inference that the deferred payments of income to the individual members have a relevant source is even stronger in the present case than in Cunard’s Trustees – because, on the Cunard’s facts, no payment would be made unless there was good reason to make one, whereas under the CAP, broadly, a payment would be made absent good reason not to. In both, a relevant source could be identified.

Two arguments the court rejected

No requirement of an enforceable right to a specific sum. Following Falk LJ, the court held that it was not necessary to identify any entitlement to the payment in terms of an absolute obligation to make it; it was nothing to the point that an original provisional decision to make the payment might be reversed (in the exercise of discretion) until such time as the payment was made and received. The contrast with Stedeford (H M Inspector of Taxes) v Beloe [1932] AC 388 (no right at all to control the discretion; payment a “mere voluntary gift”) was instructive – here the duties in Braganza v BP Shipping Ltd [2015] UKSC 17; [2015] 1 WLR 1661 gave the members a sufficient protected interest.

No requirement that the source be “possessed” by the recipient. This is the most significant clarification. The members relied on Bray (Inspector of Taxes) v Best [1989] 1 WLR 167, 173, Fitzgerald v Comrs of Inland Revenue [1919] 2 KB 154, 159; (1919) 7 TC 284, 287 and Mitchell and Edon v Ross [1962] AC 814; (1961) 40 TC 11, 61. The court held those statements were too general to gloss section 687: section 687 refers only to there being a source of the income, not a source that is possessed by the recipient of the income. A source of income may exist so long as there is some relevant and sufficient factor connecting the income and the recipient, as there is in this case. Cunard’s Trustees is another example of a case where the relevant source was not possessed by the recipient, yet the equivalent provision was applied.

The conclusion: there is no reason why the decision-making process of Mr Gerko and GSAM in implementing the CAP and the LLP Deed, subject to the Braganza obligations, cannot qualify as a relevant “source” for the purposes of section 687. On a natural reading of that term, in its context, it is the source of the deferred income received by the individual members.

A new point dispatched: section 575 and double taxation

On the appeal the members ran a fresh argument under section 575 ITTOIA – that the income fell to be dealt with under Part 2 (trade receipts), the trade of HFFX being the source, so as to exclude section 687. The court granted permission to argue it but rejected it on the merits, holding that there is no relevant overlap between taxation of the profits of the underlying trading activity of HFFX and the taxation of the deferred remuneration element received by the individual members pursuant to the LLP Deed and the CAP so as to allow for the operation of section 575.

The court also closed off the double-taxation objection. As Mr Chacko pointed out, there is no general principle that a taxpayer can deduct tax which the person paying him income has had to pay in relation to receipt of the money which put it in funds to pay that income; it is not unusual for the tax system to operate in this way – the analogy being a company paying corporation tax on profits and then paying dividends taxable in shareholders’ hands.

What has changed

• Section 687 is confirmed as a genuinely broad residual charge. A payment can have a “source” even where the recipient holds no enforceable right to a specific sum and possesses nothing that could be called a source. What is required is a sufficient legal nexus between the payment and the recipient.
• A payment made under a legally structured discretion can have a source; a “mere voluntary gift” dependent only on goodwill will not. The Braganza duties were pivotal in supplying the necessary legal nexus. But the court was careful not to overstate the point: it noted that the existence of Braganza obligations is not sufficient without more to satisfy the “source” requirement. What was sufficient here was the exercise of GSAM’s discretion to reallocate Special Capital in the context of a legal agreement which conferred rights on the individual members – the discretion and the contractual framework taken together.
• The “possession of a source” gloss is rejected for section 687. While the concept remains useful for classifying types of income in other contexts, it cannot be read into the residual charge.

Issue 3: Sales of occupation income – left open

Because section 687 applied, the court did not need to decide whether Chapter 4 of Part 13 ITA 2007 (sales of occupation income) also bit. In view of the conclusion regarding section 687, it was not necessary to address this statutory regime and, without the assistance of a full discussion of it in the Court of Appeal in these proceedings or in BlueCrest CA, it would not be appropriate to do so.

This leaves two questions expressly unresolved: whether the members’ research/software activities were “of a kind undertaken in a profession or vocation,” and whether Condition B can apply to allocations of profit among LLP members. The Upper Tribunal decided the occupation point against the members. The Condition B point had not been argued below in the same way, although Dodd v Revenue and Customs Comrs [2022] UKUT 200 (TCC); [2022] STC 1696 (BlueCrest UT) had held that an equivalent condition was satisfied. The Court of Appeal and Supreme Court declined to endorse or disapprove the reasoning, leaving the points to be argued afresh in a case where they are determinative.

Practical implications

For historic arrangements of this type. The result is a partial win for HMRC: the front-loaded section 850 charge fails, but the deferred sums are taxed as income on receipt under section 687. GSAM paid corporation tax because the profits were allocated to it, and HMRC accepted that if its section 850 appeal had succeeded, that corporation tax would have had to be repaid. Since HMRC’s section 850 appeal failed, the corporation tax position is undisturbed, and the section 687 charge on the individual members sits on top of it on receipt of the deferred sums.

For drafting and structuring going forward. The decision is double-edged. On the one hand, on these historic facts a genuine, commercially-purposed allocation to a corporate member with real discretion was respected under section 850, so the front-end charge failed. That conclusion is, however, confined to the construction of section 850 itself and says nothing about the separate anti-avoidance regimes; in particular, it must be read subject to the mixed membership rules discussed below, which can override agreed profit-sharing arrangements irrespective of contractual entitlement. On the other, the very feature that defeats section 850 (no subsisting contractual right in-period) does not protect the eventual recipient: the discretionary, Braganza-constrained award supplies the “source” that triggers section 687 on payment. There is, in effect, no gap to fall through.

The mixed membership rules. It is worth noting that the CAP was introduced before the FA 2014 mixed membership rules, now in sections 850C – 850E ITTOIA, and those rules were not in issue in the appeal. They operate differently from section 850: in defined circumstances they can reattribute to an individual member profits allocated to a non-individual member, without depending on whether the individual had a contractual entitlement to those profits. For contemporary structures, they are likely to be the first statutory route to consider. The Supreme Court’s section 850 analysis should therefore be read alongside those provisions, rather than treated as a complete answer to mixed-member profit allocation arrangements today.

The wider lesson on interpretation. Perhaps the most exportable point for tax litigators is the firm restatement that purposive construction is anchored to statutory text. Where a structure is genuine and not a Ramsay composite, an appeal to “commercial reality” untethered from the words Parliament chose will not succeed. The court’s repeated signal is that the remedy for arrangements thought objectionable lies in legislation, not in straining the language of the charge.