Partnership Taxation Issues
27 January 2010
A recent Tax Tribunal case, R J Phillips v HMRC, has confirmed that any partner may appeal against figures included in a partnership tax return, even if he or she is not the "nominated partner". The case also looks again at some of the factors which – in the absence of a written partnership agreement – are relevant in determining whether or not a partnership exists.
In 1996 Mr Phillips (the "Appellant") came together with an individual named Mr Bintliff ("Mr B") to pursue architectural work on a joint basis under the name of Studio Baad. Prior to entering into this arrangement, Mr B had traded on his own under this name.
In 2003, after a number of years of working together, the business relationship came to an end when the Appellant took legal proceedings against Mr B in connection with the disposal of part of the Studio Baad business. The Appellant alleged that he was in partnership with Mr B and that as a result of this, was entitled to a proportion of the sales proceeds. These proceedings were eventually settled by a Tomlin order.
Although, the Appellant and Mr B never entered into a written partnership agreement HMRC formed the opinion that from 1998 to 2003 the two architects had been carrying on business in partnership (under the Studio Baad banner) and opened an enquiry into the partnership tax returns in 2004.
After agreeing various amendments to the partnership returns with the partnership's accountants this enquiry was closed in 2008 and HMRC then issued a number of assessments and amendments on the Appellant for tax years between 1998 and 2003. The Appellant contested these assessments and amendments on the basis that he was not in partnership with Mr B and in hearing the appeal, the First-tier Tribunal considered two issues:
- whether there was a partnership between the Appellant and Mr B
- if there was a partnership, whether the Appellant could appeal against consequential amendments made in relation to his own returns following assessments and amendments made in respect of partnership returns.
At a preliminary hearing the First-tier Tribunal held that the Appellant and Mr B had been carrying on business in partnership. Mosedale J observed that they had shared net profits and that this was 'prima facie evidence of the existence of a partnership between them'.
Mosedale J went on to comment that it was for the Appellant to show other evidence to refute this fact and that the Appellant had failed to do this. Mosedale J ran through a number of factual matters which were pertinent to confirming whether a partnership had been established:
- Profit and loss sharing arrangements
- Whether the partnership had an appropriate letterhead
- Individual partners power to bind the partnership
- Partnership VAT registration
- Partnership tax returns.
Particular weight was given to the fact that partnership accounts had been produced and filed with the Appellants knowledge and that the Appellant had filed tax returns for the relevant periods showing a partnership profit share.
On the second point, Mosedale J held that, although Mr B had been the 'nominated partner' under s. 12AA Taxes Management Act 1970 ("TMA 1970"), the Appellant had a right of appeal against the partnership assessments, since s. 31 TMA 1970 did not 'limit the right of appeal to the nominated partner'.
Mosedale J confirmed that any partner could 'exercise the right of appeal under s. 31 TMA 1970 against assessments of the partnership or amendments to partnership returns' as an amendment to a partnership return would lead to amendments to the partners' personal returns.