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The Supreme Court has now handed down its judgment in HMRC v HFFX LLP; Atkins & Ors v HMRC [2026] UKSC 17. This case provides guidance on the operation of section 850 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA) and (more significantly) the scope of the miscellaneous income charge at section 687 ITTOIA.
HMRC are increasingly demonstrating a tendency to seek to rely on the miscellaneous income tax charge as a means to impose income tax on receipts that they consider to have an income nature, but for which there is no clear basis of charge. This is particularly in the context of the taxation of self-employed LLP members (or partners). This tendency is illustrated by other comparable cases that have come before the UK courts on equivalent issues, such as the BlueCrest case (upon which the decision in HFFX relies).
With this in mind, the Court’s decision regarding miscellaneous income, when taken together with these other cases, has wider significance for taxpayers (such as those in the private capital industry).
Overview of the case
Broadly, the case concerned structured profit-sharing arrangements within an LLP that carried on a forex trading business. Profits of the LLP, that would potentially otherwise have been allocated to individual members of an LLP, were instead allocated to a corporate member, and it was recommended that the corporate member would exercise its discretion to pay awards to the individual members over the next three years if they were not “bad leavers” (and, as such, provide incentive to the individual members to remain with the LLP). The corporate member paid corporation tax on those profits, and invested the net amounts. After it had sold the investments, the corporate member then contributed the proceeds back to the LLP as “special capital”. The special capital was then reallocated to the relevant individuals who were subsequently able to withdraw it. The position was taken that no income tax was payable by the individuals on the reallocation or withdrawal of the special capital.
There were two main issues on which the Supreme Court opined.
- First, whether the amounts allocated to the corporate member of the LLP should be regarded as taxable profits of the individual members for the purposes of section 850 ITTOIA (the Court of Appeal had held they were not to be so treated).
- Second, whether the special capital paid to members (which it was accepted was an amount in the nature of income) was subject to tax as “miscellaneous income” under section 687 ITTOIA (the Court of Appeal had determined that it was).
There was a further issue in relation to the sale of occupational income rules, but the Court did not opine on this issue and this is not considered further.
Summary of the Supreme Court decision
The Supreme Court upheld the decision and reasoning of the Court of Appeal, concluding that an income tax charge under section 850 ITTOIA did not apply to the arrangements, but that the amounts ultimately paid to the individual LLP members were subject to a miscellaneous income charge.
In relation to the application of the miscellaneous income charge, as it was accepted in HFFX that the relevant receipts were of an income (rather than capital) nature, the key issue to be determined before the Supreme Court (in order to decide whether a miscellaneous income charge applied) was whether that income had a relevant “source”.
The Court found that: “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.”
The effect of this is that, in a commercial context, it will likely only be in exceptional (unspecified) circumstances that an income receipt would not be taxable under the miscellaneous income rules, if not otherwise charged to tax. This is on the basis that it will be very difficult, in this context, to show that there is no “source” to the income concerned (the existence of a source being a condition to the miscellaneous income charge). If income is paid out pursuant to a legal framework that is intended to deliver a particular (commercial) result, that should be assumed to be enough for there to be a source and for the rules to apply.
In this respect, it is worth noting that the Court essentially followed the reasoning of the decision of the Court of Appeal in BlueCrest, which concerned similar facts.
The above said, it is important to note that a receipt also needs to be of an income (as opposed to capital) nature in order for the miscellaneous income rules to apply. Whether the amounts concerned were income in nature was not in dispute for the purposes of the Supreme Court’s decision.
As for the wider charge to income tax under section 850, the Supreme Court confirmed that there must be a contractual right (subsisting in the relevant period of account) to share in the profits of the partnership, as part of the ordinary profit allocation process. HMRC’s argument that section 850 should be applied in a way that reflects the “commercial reality of the case” was not accepted. HMRC rely heavily on a purposive approach to the interpretation of legislation, but HFFX demonstrates some of the limits to this approach.
Implications of the case for taxpayers
As explained above, as regards miscellaneous income, the technical question answered by the Supreme Court in this case is narrow and concerns the circumstances in which a “source” for income exists. However, taken together with BlueCrest and other similar cases, there are wider implications of the decision, particularly in the context of LLP member/partner taxation, which may be significant (for example, for participants in the private capital industry).
Specifically, the Supreme Court has endorsed a line of reasoning (following the reasoning given by the Court of Appeal in BlueCrest) that results in a miscellaneous income tax charge on amounts of an income nature received by self-employed members of an LLP in connection with their work for an LLP (where the amounts are not otherwise taxed as income).
Outside of the specific facts within the BlueCrest and HFFX cases, there is a question as to how far this line of reasoning should apply. Many partners/LLP members are party to remuneration arrangements or other transactions that take place outside of the ordinary allocation of trading profits, and (as a result of these decisions) it is not clear where the line should be drawn in relation to the application of the miscellaneous income tax charge. Given what the Court determined regarding the circumstances in which a source exists, the implication from HFFX is that the key question will be whether the relevant receipts are of an income or capital nature. However, that distinction can of course be highly uncertain, meaning that this will continue to be a difficult area of law for taxpayers to navigate.
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