Case Preview: Anson v Commissioners for Her Majesty’s Revenue and Customs
16 Tuesday Dec 2014
On 27 and 28 October 2014 the UK Supreme Court heard Anson v The Commissioners for Her Majesty’s Revenue and Customs, a case concerning the taxation of the remitted income of an individual who is resident, but not domiciled, in the UK. Central to the case is the UK tax treatment of the profits of a Delaware limited liability company (“LLC”), which will determine Mr George Anson’s eligibility for relief from double taxation under the UK/US Double Tax Convention.
The appellant, Mr Anson, is a member of a Delaware LLC called HarbourVest LLC (“HV”). HMRC sought to tax income arising from Mr Anson’s share of the profits of HV from 1998 – 2004, which he had remitted to the UK. On the basis that this income had already been taxed in the US, Mr Anson sought relief from double taxation under the UK/US Double Tax Convention. In order to obtain relief, Mr Anson needed to demonstrate that HMRC was proposing to tax the same income twice. This involved showing that the trade profits made by HV, and the income attributed to Mr Anson on the basis of his membership of HV, were one and the same.
Delaware LLCs are created and governed by the Delaware LLC Act. A Delaware LLC has no share capital. Profits and losses arising from its undertakings are allocated to the members in proportion to initial contributions or as agreed in an LLC agreement. The profits of the LLC are credited into members’ individual capital accounts. An LLC does, however, have separate legal personality from its members. Managing members have some discretion over the timing and amounts of distributions and reserves, but until sums are distributed to the members they belong to the LLC itself.
While they have a separate legal personality, Delaware LLCs are treated as ‘tax transparent’ in the USA. In other words, the LLC itself has no liability to tax, but rather the members of an LLC bear a liability to pay tax on their share of profit generated by the LLC. Profits are divided as between members of an LLC in accordance with an LLC agreement or, in its absence, according to the initial contributions of each member. For this reason, Mr Anson had paid federal and state tax in the US on his share of HV’s profits. For double taxation relief to apply, the same income must be seen to be taxed in both the US and the UK. The central question is whether the source of Mr Anson’s income was HV’s trade or a distribution pursuant to HV’s LLC agreement. Mr Anson must demonstrate that the income arose from a proprietary right to share of profits, not a distribution of HV’s profits which is more akin to a dividend declared by a company. This will be determined by whether or not he had a right to the profits as and when they arose.
First Tier Tribunal and Upper Tribunal Judgments
The First Tier Tribunal (“FTT”) decided that HV’s profits did belong to the members as they arose. Therefore, Mr Anson’s share of profits in HV was being taxed twice and he was entitled to claim double taxation relief. Based on its analysis of the structure of a Delaware LLC, the FTT concluded that the absence of share capital in an LLC meant the legal structure was more closely aligned to that of an English law partnership than a limited company. Therefore, it was more appropriate to treat an LLC’s profits the same way as those of a partnership in English law, where profits are treated as belonging to partners as and when they arise.
On appeal by HMRC, the Upper Tribunal determined that the FTT had been mistaken in its analysis. Mr Anson’s right to HV’s profits was contractual, not proprietary, in nature. The profits did not necessarily belong to the members of HV as they arose, but were accrued and owned by HV before being distributed between members on a contractual basis pursuant to the LLC agreement. The Upper Tribunal therefore allowed HMRC’s appeal on the basis that the amount taxed in the US constituted profits made by HV and the amount to be taxed in the UK arose from Mr Anson’s contractual right to a distribution out of those profits.
Court of Appeal decision
The Court of Appeal affirmed the Upper Tribunal’s decision. Referring to Memec plc v IRC, Lady Justice Arden agreed that the correct test for whether the same income is taxed twice for double taxation relief purposes is whether the source of the income was the same in both jurisdictions. As in the previous judgments, the key issue was whether, under UK tax law, the source of Mr Anson’s income was the profits made by HV in its trading or merely a distribution out of its profits.
Lady Justice Arden agreed that whether this income was from the same source turned on whether the members of HV were entitled to profits as they arose. She noted that the profits arose from HV’s trading as a principal and that HV could make deductions from those profits before they were allocated to members. Indeed, there were provisions in HV’s LLC agreement allowing it to withhold sums in order to account for its liabilities and certain withholding tax burdens of its members. On her assessment, it was clear that the profits belonged to HV, which as an LLC had a separate legal personality to its members. The members merely had contractual rights to have an agreed share of those profits allocated to their account in accordance with the LLC agreement. Mr Anson’s income was not therefore from the same source in both jurisdictions and so he could not obtain double taxation relief under the UK/US Double Tax Convention.
Appeal to the Supreme Court
Mr Anson’s appeal to the Supreme Court was heard by Lord Neuberger, Lord Clarke, Lord Sumption, Lord Reed and Lord Carnwath. The Supreme Court decision will provide more concrete guidance for the correct UK tax treatment of LLCs and a translation of ‘tax transparency’ from US to UK tax law for double tax relief purposes available pursuant to the UK/US Double Tax Convention.
 Memec plc v IRC (1998) 71 TC 77
 Paragraphs 30-38  EWCA Civ 63
 ibid, Paragraph 37
 ibid, Paragraph 76