You’ve been invited to join an existing, successful partnership. You will need to purchase a share of the partnership to make it official, but are there any VAT implications to think about?
Partnership reorganisation
The partnership you’re joining is a general partnership formed under the Partnership Act 1890 (as opposed to a limited liability partnership known as an LLP). Tricky tax issues can arise when partners leave or join, or they change how they share profits. HMRC’s Statement of Practice D12 tackles most of these but doesn’t touch on the VAT consequences of a partnership reorganisation.
Direct tax v VAT
For direct tax, a partnership reorganisation, e.g. where one partner reduces or increases their share of the business, is considered by HMRC to involve a transfer of all or part of each asset owned by the partnership which may result in capital gains tax bills. You would think the same pattern would be followed for VAT but it takes an entirely contrary approach.
Not a transfer of assets
For VAT purposes, HMRC’s view is that a reorganisation where there is a change in ownership of the partnership assets is not a supply of those assets and neither is it a supply of services.
Transfer of going concern?
You might think that a change in the ownership structure of a partnership’s business would be a transfer of a going concern (TOGC) and as such a supply which is outside the scope of VAT. However, a partnership reorganisation doesn’t meet the conditions for it to count as a TOGC. The main condition a reorganisation fails to meet is that “where only part of a business is sold it must be capable of separate operation”. A share in partnership assets clearly isn’t capable of operating as a business by itself.
No supply
The admission of a partner (or other reorganisation of partnerships profit sharing arrangements) doesn’t involve a supply for VAT purposes. For VAT to apply to a transaction there must be both consideration (payment) and a supply of goods or services. Case law confirms that the granting of an interest in partnership assets and profits is not a supply of either. That means the partnership must not add VAT to the price of admittance to the partnership.
Trap. There is a “deemed supply” by an incoming partner if they pay for their admission to the partnership with goods or services, but only where they are VAT registered, or liable to be registered, and the goods that are used as payment for entry into the partnership are subject to VAT. For example, if instead of cash you transferred a property to the partnership worth £120,000, and had previously opted to tax (charge VAT) the property, you would have to account to HMRC for VAT of £20,000 (£120,000 x 20/120).
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