The tax position of a business partner is very different from that of an individual who merely works for a partnership. It’s important to know which applies to avoid trouble with HMRC. What are the key factors which determine a worker’s status?
Partnerships – a matter of fact and law
HMRC isn’t keen on business partnerships involving husbands and wives or those in a civil partnerships. It often perceives them as no more than a means of sharing profits to minimise tax. However, when it suits HMRC it will happily argue that a partnership exists, as was the case in Kenroy Coke v HMRC 2017 (C v HMRC).
The facts of the case
C worked as a cook. A customer (P) asked him to work in a new café he was starting. P registered the café with HMRC as a partnership between him and C, although C was apparently unaware of this. C hadn’t put any money into the business or been involved in the business paperwork and admin. In fact, C registered with HMRC as a self-employed individual rather than as a self-employed partner. When the business failed P disappeared leaving C to carry the can (and penalties) with HMRC for failing to submit tax returns for the business.
Evidence of a partnership
C had signed a tenancy agreement for the café, as a favour to P. This, combined with the registration for tax purposes as a partnership convinced HMRC that one existed. However, the First-tier Tribunal didn’t agree. In fact, it wasn’t convinced C was even self-employed. In its judgment it said C “… believed that he was engaged as a cook and was expecting to be paid a fixed amount on a regular basis” – just like an employee. C didn’t expect and didn’t receive a share of the profits. The facts contradicted HMRC’s view and the penalties it charged for non-submission of partnership tax returns were void. This case was a classic example of HMRC cherry picking facts to suit its purpose. On other occasions (especially husband and wife partnerships) it will be selective, choosing only factors that are contrary to the existence of a partnership. You need to be prepared to argue your case if you want the tax efficiency from flexible profit sharing that a partnership offers.
Partnership defined
The law says a partnership is “the relation … between persons carrying on a business in common with a view of profit.” This is a very broad definition, but in practice it means that partners share responsibility for the bills of the business as well as sharing rights over business profits and assets. If all these features exist in a business relationship, there is a partnership in law regardless of what HMRC might like to think.
Tip. To further reinforce the existence draw up a partnership agreement. If you get into a scrap with HMRC about whether a partnership exists, a formal partnership agreement will help. However, as in C’s case, it is the whole picture which will determine if a partnership exists, not just a few chosen factors.
Tip. How the profits are shared is something partners can decide between themselves. HMRC can’t overturn this. However, there are anti-avoidance rules which can affect how much profit each partner is taxed on.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.