HMRC V Anson [2011]

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13 September 2011

Background

The recent judgment by the Upper Tier Tribunal in HMRC v Anson [2011] overturned the First Tier Tribunal's decision that double tax treaty relief was available to a UK taxpayer on his share of profits in a Delaware LLC. 

Facts

Mr Anson, a UK resident non-domiciled individual, was a member of a Delaware LLC named "HarbourVest".  HarbourVest had not elected to be treated as a corporation for US tax purposes, and as such each member was subject to US tax on their shares of the profits. 

Double taxation arises where the same income and gains are taxable in two jurisdictions.  If double taxation arises to a UK resident person, the UK generally allows the foreign tax as a credit against UK tax on the same income or gain.  The US/UK double treaty provides that US tax is allowable as a credit against any UK tax computed by reference to the same profits or income which US tax is charged on.

Mr Anson was taxed in the US on the profits of the LLC on the basis that it was "see through" so the profits were his directly.  He claimed US/UK double tax treaty relief on this remitted income.  HMRC denied that the treaty relief was available arguing that a Delaware LLC was to be treated as "opaque" for UK tax purposes, and so he should be taxed on the profits "extracted" from the LLC.  So the tax hit in the US and the UK were on different profits.   

The First Tier Tribunal found in favour of Mr Anson and as such he was entitled to double taxation relief.  Applying the judgment in Memec, the First Tier Tribunal held that the nature of HarbourVest was somewhere between a Scottish partnership and a company.  Therefore the US LLC's profits should be treated as partnership income for UK tax purposes.  This meant that individuals subject to UK income tax could obtain relief for any US tax suffered on those profits. 

Specifically, the First Tier Tribunal considered that the test in the treaty was whether Mr Anson was subject to tax "computed by reference to the same profits or income" as that which HarbourVest was taxed.  Having decided that the members of the LLC were entitled to their profits as they arose, the Tribunal held that Mr Anson was taxed on the same income in the UK as in the US, and as such, was entitled to relief under the treaty.  HMRC appealed to the Upper Tier Tribunal.

Judgement

The Upper Tier Tribunal, like the First Tier Tribunal before it, considered that the key question was whether Mr Anson was entitled to share in the LLC's profits as they arose. 

The Upper Tier judged that Mr Anson was not taxed on the same profits that were taxed in the US, which as has been mentioned above, is the test for treaty relief to apply.  It was decided that Mr Anson did not have a proprietary interest in any of HarbourVest's assets nor profits.  It was also decided that the members of HarbourVest did not have a position similar to an English partnership and the HarbourVest was not transparent for tax purposes.  The profits on which tax had been paid in the US were the profits of HarbourVest, but the UK tax charge was charged on something different: Mr Anson's distributions from the LLC Operating Agreement. 

Therefore, there were two different sources of income and as such the test in the US/UK double tax treaty was not fulfilled and relief was not available.  

Analysis

This judgment provides some clarity on the rules, albeit at the taxpayer's expense, as it seems to confirm HMRC's practice of treating Delaware LLCs as opaque for treaty purposes. It is also important to note that the precise terms of a Delaware LLC membership agreement can significantly influence the UK tax treatment of US LLC distributions.

Please contact Natalie Stoter on +44(0) 117 902 7262 or natalie.stoter@burges-salmon.com, if you have any questions.

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