There are many places in the UK tax legislation where deeming provisions are employed in order to apply the tax rules to particular situations. But questions often arise as to the scope of the deeming fiction and how much of the “real world” facts should be incorporated into the fiction. 

In the recent decision of Muller, the Court of Appeal had to consider the scope and effect of a deeming provision which is part of the rules for taxation of partnerships. Although a UK limited liability partnership (LLP) has separate corporate identity, it is treated as transparent for tax purposes (with the partners treated as carrying on the trade). Where one or more members of an LLP is itself a company within the charge to UK corporation tax, section 1259(3)(a) CTA 2009 provides that the profits of the trade are to be determined as if the actual trade of the LLP were carried on by a UK resident company. The Court of Appeal had to consider how the intangible fixed assets rules in Part 8 of the Corporation Tax Act 2009 (specifically the exclusion from amortisation deductions for assets acquired from a related party) fit in with this notional UK company fiction.

In the Muller case, three UK companies in the Muller group had established a UK limited liability partnership (LLP) to which they transferred their trades (including various intangible assets and, in particular, goodwill) in return for membership units in the LLP. The assets were recorded at fair value in the LLP’s accounts and the intangible assets were amortised over five years on a straight-line basis. In computing the LLP’s profits for the purposes of the corporate members’ tax returns, deductions were claimed for the amortisation expense. HMRC denied these tax deductions for each of the relevant years on the basis that the intangible assets were acquired from a related party.

The issue was whether in the deemed world of the notional UK resident company carrying on the trade, the intangible assets were acquired from a related party for the purposes of section 882 of CTA 2009. Did the deeming provision require, as HMRC argued, that the ownership and control that existed between the corporate members and the LLP in the real world must be replicated in the deemed world? The Court of Appeal held (as had the tribunals before it) that it did. 

The Court of Appeal found that the purpose of the deeming provision was to ascertain the profits of the LLP to be divided between the three UK resident corporate members in proportion to their membership units on the hypothesis that the trade of the LLP were carried on by “a UK resident company”. This meant taking into account for the notional computation all the factual details and circumstances of the LLP’s real trade, including the ownership and control characteristics of the LLP “at least for the purposes of applying section 882 of CTA 2009”. 

Should deeming provisions be drafted more prescriptively?

In the absence of a comprehensive tax code that does not rely on deeming to achieve the correct outcome, deeming provisions are an integral part of the UK tax rules. Although it is tempting to think a few more lines of drafting could make the scope of a deeming provision clearer, making express provision for the attribution of some but not all of the “real world” imports could cause further uncertainty so perhaps they are best left to judicial interpretation taking into account all the facts and circumstances and the purpose of the legislation. 

The Tribunals and courts are experienced in construing deeming provisions in both direct and indirect tax legislation, working out how far a fiction is brought into the real world and also how much of the real world is required to be attributed to the fiction. Indeed, the Court of Appeal in Muller referred to the guidance distilled from case law by Lord Briggs JSC in the Supreme Court in Fowler. Of this guidance, the three principles the Court of Appeal in Muller emphasised are:

• “The extent of the fiction created by a deeming provision is primarily a matter of construction of the statute in which it appears.”
• “For that purpose the court should ascertain, it if can, the purposes for which and the persons between whom the statutory fiction is to be resorted to, and then apply the deeming provision that far, but not where it would produce effects clearly outside those purposes.”
• “But the court should not shrink from applying the fiction created by the deeming provision to the consequences which would inevitably flow from the fiction being real.” 

The starting point is the purpose of the deeming provision. The extent of deeming will then be commensurate to the statutory purpose. In the Muller case it was only the characteristics necessary to calculate profits which required attribution but, as the Court pointed out, this is not to say that another deeming provision might require other assumptions, such as whether a company is public or private.