Partners, partnerships and tax

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09 December 2008

Background

In the case of Revenue and Customs Commissioners ("the Commissioners") v. Pal and others [2006] EWHC 2016 (Ch) the 4 taxpayers (Mr and Mrs Pal, Mr Alonso ("Mr A") and Mr Bouacheri ("Mr B")) ran a bar and restaurant. Mr and Mrs Pal were granted a head lease of the business premises ("the Premises"). Mr A and Mr B formed a partnership and agreed with Mr and Mrs Pal to run a restaurant from the Premises.

The freehold owners of the Premises would not allow Mr A and Mr B to become sub-tenants on the lease, so the Pals agreed to be registered for VAT purposes as partners of the business to surmount the problems with the head-lease. The true position was that only Mr A and Mr B were partners in the business. They applied for VAT registration and in the accompanying form (VAT 2) all the taxpayers said they were partners for VAT purposes and signed it. 

Accordingly, the Commissioners completed registration in the name of Tapas Bar Cerveceria ("TBC"). TBC failed to make VAT returns and the commissioners made an assessment against TBC and the 4 "partners". The taxpayers appealed to a VAT and Duties Tribunal. 

On a preliminary ruling, because Mr and Mrs Pal had never been members of the partnership, the tribunal declared that the assessment by the commissioners was invalid. The commissioners appealed. On appeal it was decided that:

  1. There had been no partnership comprising the four taxpayers and therefore they could not and did not together constitute a taxable person for the purpose of section 3 of Value Added Tax Act 1994 ("VATA"). Signing of the VAT 2 form by Mr and Mrs Pal (the non-partners) did not have the effect of holding them out (as partners) rendering them liable to pay the tax.
  2. A registration under section 45(1) of VATA was not the registration of each of the partners as an individual, but they were deemed to be registered on a collective basis. For the taxpayers to be a taxable person they had to be carrying on business in
    partnership and not a situation in which some of them had merely held themselves out as partners.
  3. The registration using form VAT 2 could only take effect in relation to those who were on form VAT2 and who were partners (and therefore constituted a taxable person) Mr A and Mr B were both partners in the partnership and were therefore a 'taxable person'. An assessment made in the name of the partnership was valid in respect of the signatories who were genuine partners.

Conclusions
VAT registration of persons carrying on a business as a partnership may be in the name of the firm. This is procedural and permissive. It does not create a legal entity independent to the partners. 

A notification of liability to register as a partnership is to be accompanied by Form VAT 2 which shows the name address signature of each partner. Merely signing the Form VAT 2 does not make the signatory a partner if other evidence indicates to the contrary.
An assessment can be made against those people who have signed the VAT 2 and are in fact partners.

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