The UK Supreme Court ruled on 17 June 2026 in HMRC v HFFX LLP [2026] UKSC 17 that deferred payments made to partners through the firm's Capital Allocation Plan are taxable as miscellaneous income under section 687 of ITTOIA 2005, dismissing appeals from both HMRC and the individual partners.Â
The UK Supreme Court ruled on 17 June 2026 that payments received by partners under a deferred remuneration scheme are taxable as miscellaneous income under section 687 of ITTOIA 2005, upholding the Court of Appeal’s decision in HMRC v HFFX LLP [2026] UKSC 17. The judgment pertains to a tax dispute between HMRC and HFFX LLP, a foreign exchange trading firm.
The case centres on the Capital Allocation Plan (CAP), a mechanism designed to defer partner remuneration and reduce tax liabilities by routing profits through a corporate member. The Court examined whether these deferred payments should be taxed as partnership profit shares under section 850 of ITTOIA or as miscellaneous income under section 687.
Ultimately, the Court dismissed HMRC’s appeal, ruling that the partners did not have a contractual right to the profits during the relevant period to trigger section 850. However, it also dismissed the partners’ appeal, concluding that the payments were taxable as income because they originated from a legally defined source through the exercise of discretion.
Facts of the case: The capital allocation plan (CAP)
HFFX is a limited liability partnership (LLP) established in 2010 that generated large profits in the foreign exchange market. To distribute these profits while minimising tax liabilities and incentivising members to remain with the firm, HFFX utilised a deferred remuneration mechanism known as the Capital Allocation Plan (CAP).
Under the CAP, a significant portion of profits (typically around 50%) that would have ordinarily gone to individual members was instead allocated to a corporate member, GSA Member Limited (GSAM). The primary tax advantage was that GSAM was subject to a lower corporation tax rate, rather than the higher income tax rates that would have applied to the individual members.
GSAM invested the allocated profits in funds and subsequently sold them in three equal annual tranches, returning the proceeds to HFFX as “Special Capital”. GSAM held “absolute discretion” over whether to reallocate this Special Capital to the individual members. However, it was agreed that this discretion was subject to an implied Braganza duty, meaning GSAM was legally obligated to exercise its discretion rationally and for its proper conferred purposes. This discretion was genuine and occasionally exercised to penalise “bad leavers” or account for poor performance.
Core issues
The Supreme Court had to resolve two primary appeals concerning the Income Tax (Trading and Other Income) Act 2005 (ITTOIA):
- HMRC’s Appeal (Section 850): Whether the profit shares allocated to GSAM should actually be regarded as the individual members’ profit shares determined “in accordance with the firm’s profit-sharing arrangements” under section 850.
- The Individual Members’ Appeal (Section 687): Whether the Special Capital received by the individual members constituted income from a relevant “source” and was therefore taxable as miscellaneous income under section 687.
Decision on Section 850 ITTOIA 2005
The Supreme Court dismissed HMRC’s appeal, ruling that the special capital could not be taxed under section 850.
Lord Sales explained that the general scheme of taxation for partnerships operates on a “look-through” basis, which requires certainty regarding who is responsible for the tax during a specific accounting period. For section 850 to apply, an individual partner must have a contractual right subsisting in the relevant period of account to receive that specific share of the profits.
Because the deferred remuneration sums under the CAP were discretionary and distributed in later tax years, the individual members had no contractual right to receive those specific sums during the relevant period of account.
The Court rejected HMRC’s argument to look broadly at the “commercial reality” of the situation, maintaining instead that the statute relies on the strict contractual rights of the partners during the specific period.
Decision on Section 687 ITTOIA 2005
The Supreme Court also dismissed the individual members’ appeal, confirming that the Special Capital was fully taxable as miscellaneous income under section 687.
The individual members had conceded that the payments were “income” and not purely voluntary gifts, but they argued that the income lacked a taxable “source” because they had no absolute legal entitlement to it prior to the exercise of GSAM’s discretion.
The Supreme Court rejected this argument. Relying on historic tax cases such as Cunard’s Trustees, the Court concluded that the exercise of a discretion framed by a legal instrument to pay a sum naturally qualifies as a “source” for the purposes of the tax regime.
The individual members’ underlying rights outlined in the LLP Deed, combined with the discretionary decisions taken by GSAM in their favour (which were governed and protected by the implied Braganza obligations), provided a sufficient legal foundation to act as the source of the income. Therefore, the combination of the legal framework and the exercise of discretion amounted to a valid source, making the deferred remuneration taxable under section 687.
