The UK’s Upper Tribunal considers the mixed member partnership rules in the context of an LLP’s incentive arrangements

The Upper Tribunal (“UT”) decision in The Boston Consulting Group UK LLP [2026] UKUT 00025 (TCC), overturning the decision of the First-tier Tribunal (“FTT”) carries a number of significant lessons for the taxation of mixed member partnerships that have operated long term incentive arrangements.

The UK’s mixed member partnership rules

The “mixed member partnership rules” (the “MMRs”) were introduced into UK tax legislation with effect from 6 April 2014, and broadly apply to all partnerships, including limited liability partnerships (“LLPs”), which consist of corporate and individual members. The MMRs were intended by the UK Government to prevent tax from being unfairly avoided through the allocation of taxable profit to a corporate member of a partnership (which would benefit from a lower tax rate of corporation tax), instead of those taxable profits being allocated to an individual member of the same partnership (in respect of which that individual would be subject to a higher rate of income tax). 

The application of the MMRs depended on an allocation of profit being made in the partnership to a corporate member and then one of two conditions being met, which are termed “Condition X” and “Condition Y” in the relevant legislation (located in section 850C of the Income Tax (Trading and Other Income) Act 2005):

• “Condition X” is met if it is “reasonable to suppose” that the profit share allocated to the corporate member of the partnership is an amount representing the “deferred profit” of the individual member and that, as a result, the individual member’s profit share, and tax liability, is reduced.

• “Condition Y” is satisfied where the corporate member of the partnership receives an excess profit allocation but an individual member has the “power to enjoy” the corporate member’s share and it is reasonable to suppose (among other things) that the individual member’s profit share and tax liability are reduced as a result of that individual member’s power to enjoy.

The consequence of the MMRs applying is to increase the individual member’s taxable profit share by an amount of the corporate member’s profits as is reasonably attributable to the individual member’s “deferred profit” or “power to enjoy”.

The Boston Consulting Group case

Boston Consulting Group UK LLP (“BCG”) is part of a privately-owned corporate group, headed by The Boston Consulting Group Inc. (“BCG Inc.”), which provides consultancy services. BCG set up a number of long-term incentive arrangements for its UK managing directors and partners (“MDPs”). The MDPs were awarded “Capital Interests”, and payments on completion of long service or retirement were made in respect of those Capital Interests. 

The intention of BCG was that the Capital Interests would be treated as capital assets of the MDPs for UK tax purposes, with the intention that payments in respect of the Capital Interests would be subject to capital gains tax and not income tax (charged at a higher rate). BCG’s argument for that treatment was that payments in respect of the Capital Interests represented the sale of part of the goodwill or capital of BCG’s business by the MDPs. 

H.M. Revenue & Customs (“HMRC”) argued that the payments relating to the Capital Interests should be treated as income in nature. Those payments should, HMRC argued, be reallocated from the corporate member, in accordance with BCG’s partnership agreement. In addition, for taxable periods after the introduction of the MMRs, HMRC submitted that the amounts paid in respect of the Capital Interests should be taxable as income in accordance with Condition X and Condition Y of the MMRs. 

HMRC made various amendments to the partnership tax returns filed by BCG, and issued tax assessments on a discovery basis against the MDPs as individual members of BCG.

The FTT decision

While the FTT had concluded that the payments in respect of the Capital Interests were income (and not capital) in nature, the FTT did not agree with HMRC’s submissions that the Capital Interests should be reallocated from the corporate member to the MDPs.

Furthermore, the FTT held that the mixed membership partnership rules did not apply to treat the amounts received by MDPs on disposal of Capital Interests as income profits, concluding that neither Condition X or Condition Y was met. The FTT’s reasoning was that even if the Capital Interests had not been created, some alternative incentive structure would have been used by BCG, and profit allocations to the corporate member would have been made in an equivalent manner under that alternative structure. Such a broad-based counterfactual alternative was “reasonable to suppose”, following the statutory wording of the MMRs.

The UT decision

The UT found comprehensively for HMRC.

The payments relating to Capital Interests were not made for the disposal of a capital interest.  After examining the partnership agreement of BCG, the UT concluded that the Capital Interests were not units of capital or units of value.  Payments in respect of the Capital Interests were simply payments to the MDPs at specific events – such as on, or approaching, retirement by reference to increases in the share value of shares of BCG Inc.

The Upper Tribunal found that payments in respect of the Capital Interests before the introduction of the MMRs could be taxed as miscellaneous income or, potentially, were taxable under the occupational income provisions in the UK tax code. For tax years in which the MMRs applied, the UT concluded that both of the anti-avoidance provisions of the MMRs, Condition X and Condition Y, were satisfied. 

Satisfying Condition X

Condition X was satisfied in respect of the amounts representing the MDP’s deferred profit being included in the corporate member’s profit share.  It was, the UT concluded, reasonable to suppose that, as a result of BCG’s arrangements with regard to the Capital Interests, the MDP’s profit share (and associated tax liability) would be lower than it otherwise would have been (paragraphs 218 and 219). This was a counterfactual test. The key question – whether it was reasonable to suppose that the profit shares would be higher for MDPs if profit was not being deferred – could not be answered by saying there was a hypothetically different system for conferring benefits on the MDPs. That counterfactual approach would leave Condition X impossible to satisfy, HMRC had argued. The UT agreed with HMRC’s argument in this respect.  There was “no reason to speculate” as to how the arrangements could have been implemented under a different approach than the one actually taken by BCG (paragraph 219). The counterfactual required by Condition X, was therefore construed in a narrow context by the UT.

Satisfying Condition Y

The UT also concluded that Condition Y was satisfied. The UT concluded that the partnership profit share of the corporate member exceeded the appropriate notional profit. The UT further concluded that the MDPs had the power to enjoy the corporate member’s profit share, owing to the MDPs being able to receive benefits provided out of the corporate member’s share of profits. In that regard, the UT followed the FTT in identifying that “benefit” had a broad interpretation.  Such a “benefit” would, for example, be provided by the sale of Capital Interests by the MDPs to the corporate member of BCG (paragraph 238).     

The key question in Condition Y was then whether the MDP’s profit share was lower than it would have been absent these arrangements with the corporate member of BCG. In respect of this counterfactual test, the UT held that that it was “plainly reasonable” that but for these arrangements, the profit shares of the MDPs would have been higher (paragraph 253).

There was, stated the UT, no need to answer that counterfactual question by assuming an alternative arrangement “for which there is no factual basis” (paragraph 254). The relevant question, according to the UT, was where the profits would have been allocated if such profits had not been allocated to the corporate member. The result, for all the ostensible breadth of alternative arrangements which might have been considered as a relevant counterfactual, was far more binary.  In effect, the UT concluded that where profits could have been allocated to the MDPs to increase their profit share that counterfactual alone was all that needed to be identified.

Conclusion

The decision in Boston Consulting Group is a timely reminder that where anti-avoidance legislation uses language to suggest a counterfactual approach, it might be the view of the Court or tribunal that only one such counterfactual needs to be identified. 

In Boston Consulting Group, the allocation of a significant margin of BCG’s profits to the corporate member to fund purchases of Capital Interests was a key fact on which the UT focused. It is hard to escape the conclusion that this factual element underpinned the subsequent conclusions of the UT regarding the counterfactual transaction that the UT chose to identify in satisfying the requirements of the MMRs.