Partnership taxation
Tax treatment of ‘capital interests’ held by individual partners in a UK LLP
The Upper Tribunal (UT) has largely allowed HMRC’s appeal, and dismissed the taxpayers’ cross-appeal, in the case of Mark Benedict Holden v HMRC. The case concerns the tax treatment of individual members of a UK limited liability partnership (LLP) in respect of amounts identified as ‘capital interests’ in various LLP agreements. The ‘capital interest’ arrangements were put in place by The Boston Consulting Group UK LLP, following its establishment as an LLP in 2011, and were structured in a manner that was intended to cause them to be regarded as capital assets for tax purposes. HMRC disagreed and amended partnership statements and/or issued discovery assessments in respect of the years 2012/13 through to 2016/17.
The UT considered a number of substantive matters and procedural issues, including whether the First-tier Tribunal (FTT) was wrong to hold that the ‘capital interests’ were not interests in the capital of the LLP. The UT concurred with the FTT that the payments could not be regarded as payments in respect of an interest in capital or goodwill. The UT also considered whether the FTT was incorrect to decide that the mixed member partnership rules (MMRs) at s850C, Income Tax (Trading and Other Income) Act (ITTOIA) 2005 did not apply. The UT ultimately agreed with HMRC that the MMRs in fact applied. In respect of the earlier years pre-dating the enactment of the MMRs, the UT agreed with the FTT that the payments received by the individual members were taxable as miscellaneous income (s687, ITTOIA).
Were its findings on the MMRs to be incorrect, the miscellaneous income provisions would also have applied in the later years. In the event that the ‘capital interests’ were in fact capital in nature, and the UT’s findings relating to the MMRs and/or miscellaneous income were incorrect, the UT considered that the sale of occupation income provisions would have applied, with the individual members charged to income tax on “the capital amount receivable” by each of them.
From the Business Tax Briefing dated 23 January 2026, published by Deloitte
VAT
Jurisdiction of First-tier Tribunal
The Court of Appeal (CA) has considered the nature of the First-tier Tribunal’s (FTT’s) jurisdiction. HMRC had disallowed input tax claimed by FS Commercial Limited on the basis that it had not provided VAT invoices to support input tax recovery, as requested by HMRC. In the course of preparing for its appeal to the FTT against HMRC’s assessment for the input tax, FS Commercial sought to include the invoices that had previously not been provided.
The FTT ruled that its jurisdiction was supervisory only; it could review the reasonableness of HMRC’s decision not to accept alternative evidence in the absence of valid VAT invoices. However, it did not have appellate jurisdiction, which would have allowed it to make its own decision regarding the deductibility of the input tax, taking into account the now-provided invoices. Accordingly, FS Commercial was not able to rely on invoices that had not been provided to HMRC before the decision to disallow the input tax was made. The Upper Tribunal (UT) upheld the FTT decision.
The CA has agreed with the FTT and UT. The CA identified that this dispute concerned the exercise of HMRC’s discretion to allow the deduction of input tax in the absence of invoices where there is sufficient alternative evidence. The CA did not accept FS Commercial’s argument that the issuing of an assessment meant that an appeal against the assessment would engage the FTT’s appellate jurisdiction, allowing the presentation of new evidence. The CA found that the FTT's jurisdiction is supervisory when considering disputes concerning the exercise of HMRC’s discretion as to whether to accept alternative evidence, and this does not change just because an assessment was issued. The CA dismissed FS Commercial’s appeal.
From the Business Tax Briefing dated 30 January 2026, published by Deloitte
Whether a supply was in the course of catering
Slice of Pie Limited (SPL) supplied food to nurseries for lunches and afternoon teas. The food was supplied cooked and hot, with each component of the meal (protein, carbohydrate, vegetables, pudding, etc) delivered in separate containers. Upon delivery, nursery staff would prepare and serve the food onto individual plates for each child. SPL submitted a VAT claim to HMRC on the basis that the supply was zero-rated as a supply of food. HMRC considered that the supply was of catering, and therefore standard-rated. The First-tier Tribunal (FTT) has agreed with HMRC.
The FTT considered the factors for and against the supply being ‘catering’, and concluded that “the ordinary person would regard the supply as catering: hot, ready-to-eat meals delivered for immediate consumption, ordered from a menu, and presented in a manner consistent with commercial catering”. The additional steps undertaken by the nurseries did not amount to significant food preparation. The FTT dismissed SPL’s appeal.
From the Weekly VAT News dated 26 January 2026, published by Deloitte
Practical Points
Every month, the Tax Faculty publishes short, practical pieces of guidance to help agents and practitioners in their day-to-day work.
