Disposals of capital interests were miscellaneous income

The taxpayers were individual partners in a management consulting firm which conducted business in the UK through a UK limited liability partnership (LLP). The main issue was the tax treatment of payments received by those partners on the disposal of capital interests they held in the LLP. Capital interests were allocated to partners in the firm and their value increased or decreased based on the group’s performance. The taxpayers said the disposals should be taxed on a capital gains basis with entrepreneurs’ relief. HMRC’s position was that the payment should be taxed as income under the partnership profit sharing rules (ITTOIA 2005 s 850) or as miscellaneous income (ITTOIA 2005 s 687) or as proceeds from the sale of occupational income (ITA 2007 Pt 13 Ch4).

The First-tier Tribunal found that capital interests were allocated to partners in the firm as part of the overall...