Discretionary payments to LLP members were miscellaneous income

An investment management business GSA transferred its high-frequency foreign currency trading team to the HFFX LLP. As a result members of that trading team - the individual taxpayers in the appeal - became self-employed partners of the LLP. Under an incentivisation arrangement 50% of the pay-out that the team would otherwise have received was allocated to a corporate member of the LLP. The corporate member invested these amounts and returned the net proceeds back to HFFX LLP as ‘special capital’. The corporate member then allocated the special capital to the individual members.

The aim was that the corporate member would be taxed at corporation tax rates on the sums allocated to it and that the subsequent reallocation of the special capital to individual members would not give rise to tax for the individual members.

HMRC disagreed saying the reallocated special capital was taxable as miscellaneous income (ITTOIA 2005 ...