Commissioners for His Majesty’s Revenue and Customs v HFFX LLP [2026] UKSC 17

Partners in a forex trading LLP deferred part of their profits through a discretionary corporate-member scheme, hoping to pay corporation tax rather than income tax. The Supreme Court held that section 850 ITTOIA did not apply. However, the deferred receipts were taxable as income from a ‘source’ under section 687.

Background

HFFX LLP was a limited liability partnership whose members researched and formulated high frequency foreign exchange trading strategies for the GSA group. It was highly profitable. From 2010 until 2015 it operated a Capital Allocation Plan (the CAP) under an elaborate LLP Deed. The tribunals found that the CAP had the avoidance or reduction of tax as one of its main objects, alongside genuine commercial purposes of retaining and incentivising members.

Under the CAP, about 50% of each participating individual member’s notional profit share above a threshold (the ‘Pre-Retention Amount’) was allocated to a corporate member, GSA Member Limited (GSAM). GSAM paid corporation tax, invested the net sum in GSA fund shares and, on the recommendation of the Managing Member, Mr Gerko, later contributed the proceeds to HFFX as ‘Special Capital’ in three annual tranches. It then reallocated that capital to individual members, who could withdraw it. The LLP Deed gave GSAM ‘absolute discretion’ over reallocation. It was common ground that this discretion was subject to the implied duty of rationality and proper purpose recognised in Braganza v BP Shipping Ltd [2015] UKSC 17. The discretion was real and was in fact exercised. For example, a ‘bad leaver’ lost his indicative award, which was redistributed to other members.

The intended effect was that profits allocated to GSAM would bear corporation tax rather than higher-rate income tax, and that reallocations would be tax-free capital. Before the Supreme Court, the individual members conceded that the reallocations were income.

The issues

Two appeals were heard together:

• HMRC’s appeal: whether the profit shares allocated to GSAM were, under section 850 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA), to be treated as the individual members’ profit shares in accordance with HFFX’s ‘profit-sharing arrangements’. HMRC invited the Court to overrule the reasoning of the Court of Appeal in Dodd v HMRC (BlueCrest CA) [2023] EWCA Civ 1481.
• The individual members’ appeal: whether the Special Capital they received was charged to income tax under section 687 ITTOIA, as income from a source not otherwise charged. If not, the question was whether the receipts were caught by the ‘sales of occupation income’ rules in Chapter 4 of Part 13 of the Income Tax Act 2007.

The decisions below

The First-tier Tribunal held that section 850 did not apply, because the members had no contractual entitlement to the profits allocated to GSAM. It held that section 687 did apply. It also held that the members carried on activities of a kind undertaken in a profession for the purposes of Chapter 4 of Part 13 ITA 2007. The Upper Tribunal upheld those conclusions. The Court of Appeal (Falk LJ) dismissed both appeals. HMRC accepted that BlueCrest CA was determinative of the section 850 point at that level. The Court of Appeal declined to decide the ITA 2007 issue.

The Court’s reasoning

Section 850 ITTOIA: the meaning of ‘profit-sharing arrangements’

Lord Sales, with whom the other Justices agreed, held that section 850 requires a contractual right subsisting in the relevant period of account:

It is implicit in this provision 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. In my view, this means that the arrangements have to include a contractual right for the partner to receive (or suffer) the part of the firm’s profit (or loss) which is to be treated as his or her income under this provision in that period.

The Court supported this reading in several ways:

• It drew on the background of the Partnership Act 1890 and on Bucks v Bowers.
• It relied on the ‘look-through’ scheme for taxing partnerships under sections 848, 849 and 863 ITTOIA. That scheme requires the whole of the profits for a period to be attributed to the partners, both individual and corporate, by reference to their rights in that period. It makes no provision for later adjustment.
• It emphasised the value of certainty:

The regime requires certainty as to who has responsibility for payment of tax in relation to profits and losses of a partnership, and section 850 provides it. It states a simple rule which minimises the difficulties of application and the dangers of capriciousness (and scope for avoidance) in its operation which might otherwise arise.

Because the individual members had no contractual right during the relevant period to the sums allocated to GSAM, section 850 could not convert their later deferred remuneration into income of that period.

Mr Baldry KC, for HMRC, argued that Sir Launcelot Henderson had erred in BlueCrest CA by referring to ‘actual’ rather than taxable profits. The Court rejected this. The contractual share of accounting profits can be transposed pro rata onto taxable profits, and that is what section 850 requires.

The limits of purposive interpretation

HMRC’s central submission relied on Rossendale BC v Hurstwood Properties. It was that section 850 should tax partners according to the ‘commercial reality’ of the division of profits, under which members received sums reflecting their contributions. Lord Sales endorsed Sir Launcelot Henderson’s rejection of this argument in BlueCrest CA, including his observation that:

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 as happened in 2014.

The CAP had a valid commercial purpose. Unlike in Ramsay, no part of its operation lacked that purpose so as to justify disregarding it. Lord Sales stated that ‘The purpose of the statutory regime is to be determined primarily by reference to the language used by Parliament, read in context.’ He went on:

However, 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. The meaning of a provision is to be derived from the words used, according to their ordinary and natural meaning as read in context.

Section 687 ITTOIA: the requirement of a ‘source’

Section 687 re-enacts the residual charge formerly found in Case VI of Schedule D. The Court therefore treated the authorities on that Case as relevant, applying the Tax Law Rewrite presumption that the law was not changed (R (Derry) v HMRC). The only issue was whether there was an identifiable ‘source’. It was common ground that the payments were not purely voluntary, because they were made under a contractual discretion governed by Braganza.

Lord Sales relied heavily on Cunard’s Trustees v IRC, where Lord Greene MR said:

[Her] title to the income arose when the trustees exercised their discretion in her favour and not before. At that moment a new source of income came into existence.

He observed that whether a payment is income and whether it has a source are closely bound up, and stated the governing principle:

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.

The Court considered the inference of a source to be even stronger here than in Cunard’s Trustees. Schedule 7 to the LLP Deed gave members the clear impression that awards would be withheld only in specified circumstances. Broadly speaking, a payment would therefore be made unless there was good reason not to make one.

The Court treated the authorities relied on by Mr Prosser KC, for the members, as follows:

• Drummond v Collins was read as supporting HMRC: the beneficiaries’ interests under the will, combined with the exercise of the trustees’ discretion, constituted the source.
• Stedeford v Beloe was distinguished as a case of a ‘mere voluntary gift’ where the recipient had no right to control the discretion.
• Brocklesby v Merricks and Manduca v HMRC were held consistent with the analysis.

Rejection of a ‘possession’ requirement

Mr Prosser argued that a source must be something possessed by the recipient, relying on Bray v Best, Fitzgerald v IRC and Mitchell and Edon v Ross. The Court rejected this, holding that general statements could not import qualifications into the statutory words:

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.

Lord Atkin’s dictum in Rhodesia Metals confirmed that ‘source’ is to be interpreted realistically and according to its natural meaning. The Court agreed with Falk LJ that the members’ rights under the LLP Deed, combined with the decisions taken in their favour to reallocate Special Capital, amounted to a source.

The new section 575 argument

The Court granted permission for a new point to be argued. This was that section 575 ITTOIA gives priority to Part 2 (trading income), so that section 687 is excluded. The Court rejected the point. Following BlueCrest UT, the source of the deferred remuneration was GSAM’s separate decision to reallocate, not HFFX’s trade, so there was no relevant overlap. Mr Prosser’s own section 850 submissions emphasised that the deferred remuneration was distinct from the trading profits. As Mr Chacko, for HMRC, 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.’ The payments came out of GSAM’s funds, by analogy with dividends paid out of a company’s taxed profits.

Sales of occupation income

Because section 687 applied, the Court declined to decide the Chapter 4, Part 13 ITA 2007 issue. It neither endorsed nor disapproved the tribunals’ reasoning, and said the point should be argued afresh in a case where it is determinative.

Practical significance

The decision definitively settles the tax treatment of corporate-member deferred remuneration structures of the kind used in HFFX and BlueCrest.

• Section 850: profit allocation is tied to contractual rights subsisting in the period of account. A genuine allocation to a corporate member, made under an arrangement with real commercial purpose, will be respected even where tax avoidance is a main object. This is significant both for HMRC and for LLP structuring.
• Purposive interpretation: the judgment marks the limits of the Ramsay and Rossendale approach. Statutory purpose must be anchored in the statutory language, not in an abstract appeal to ‘commercial reality’.
• Section 687: the residual charge is a broad ‘sweeping up’ provision. Payments made through the exercise of a Braganza-constrained contractual discretion, within a legal framework conferring rights on the recipient, have a sufficient source. The recipient need not possess the source or hold an absolute entitlement.
• Practical outcome: partners receiving deferred awards through such structures will be taxed on them as income when received. HMRC accepted that, had its section 850 appeal succeeded, GSAM’s corporation tax would have had to be repaid. The sales of occupation income question remains open.

Verdict: The Supreme Court unanimously dismissed both appeals. On HMRC’s appeal, section 850 ITTOIA did not treat the profits allocated to GSAM as the individual members’ profit shares, and the reasoning in BlueCrest CA was upheld. On the individual members’ appeal, the deferred remuneration received as reallocated Special Capital was income from a source and chargeable to income tax under section 687 ITTOIA. The new section 575 argument was permitted but rejected. The Court did not decide the Chapter 4, Part 13 ITA 2007 (sales of occupation income) issue.

Source: Commissioners for His Majesty’s Revenue and Customs v HFFX LLP [2026] UKSC 17