Defining general, or ordinary, partnerships for tax

Partnerships are a difficult business category from a tax perspective. The UK tax system has seemingly (to me, at least) struggled to accommodate partnerships satisfactorily. Furthermore, before a partnership (or rather, its partners) can be taxed, it needs to be identified. This can be a challenging task.

All shapes and sizes

A partnership is broadly a relationship resulting from a contract or agreement, which could be written or oral. If no oral agreement previously existed, the partnership is effective from the date of execution and implementation of a written agreement; it cannot have retrospective effect (eg, see Ayrshire Pullman Motor Services & Ritchie v CIR, CS 1929, 14 TC 754).

‘Partnership’ is defined (in s1, Partnership Act 1890 (PA 1890)) as: “the relation which subsists between persons carrying on a business in common with a view to profit”. ‘Persons’ includes individuals, corporate bodies and settlement trustees. In England, Wales or Northern Ireland, a partnership is not a legal person; however, under Scottish law, partnerships have a distinct legal personality. Much has been written on the meaning of ‘business’ and the factors determining its existence (or otherwise), so the definition is not considered further here. 

There are several types of partnership. This article focuses on general (or ‘ordinary’) partnerships, which are probably the most common form of partnerships in the UK.

Defining a partnership

A set of rules (in s2, PA 1890) is intended to assist in determining whether a general partnership exists. For example, the joint ownership of property (eg, as joint tenants or tenants in common) does not of itself create a partnership; nor does the sharing of gross income.

On the other hand, the receipt of a profit share from the business is prima facie evidence that a person is a business partner. However, the receipt of a profit share contingent on, or varying with, business profits does not of itself make the person a business partner. HMRC considers that an agreement to share net losses (ie, being obliged to make good those losses) is an even stronger indication of partnership (see HMRC’s Partnership Manual at PM133000).

The lack of definitive statutory provisions to determine the existence of a partnership has resulted in numerous cases, in which the courts and tribunals have held to the facts and evidence that a partnership existed (eg, Fenston v Johnstone (1940) 23 TC 29) or did not exist (eg, CIR v Williamson (1928) 14 TC 33).

Spouses and civil partners

A mere assertion that a partnership exists is not conclusive if there is no supporting evidence. A written business partnership agreement between spouses or civil partners is (in the author’s experience) uncommon. It may be difficult to convince HMRC (or the tax tribunals) of the existence of a business partnership between spouses or civil partners.

This was demonstrated in the recent case SC Properties Ltd & Anor v Revenue and Customs [2022] UKFTT 214 (TC).

 In 1989 the second appellant (RC) and his wife purchased land (including a property) in southern England. In 1997, the first appellant (SCP) was incorporated, primarily as a property development company, owned in equal shares by the spouses. Planning permission was granted for the development of the property. According to RC, on 17 September 2014 the spouses created a partnership to develop the property, and the property was appropriated to trading stock of the partnership. An unconnected finance company (CBPF) granted the couple a loan facility. In February 2015, the property was professionally valued for loan purposes. The market value was £830,000, and the ‘gross development value’ was £2,000,000.

In August 2015, an option agreement was made by SCP and the couple, granting SCP the right to purchase the property for £830,000, for consideration of £1. In January 2016, the couple submitted an election to HMRC (under s161(3), Taxation of Chargeable Gains Act 1992) to defer any gain on the increase in the land value to date. According to RC, contracts were exchanged on 25 April 2016 for SCP’s acquisition of the property. On 9 June 2016, registered title to the property was transferred; SCP obtained a loan of £1,215,000 from CBPF to acquire the property; and £830,000 was credited to the couple’s directors’ loan account with SCP in consideration for the property (then valued at £1,583,945).

On 31 January 2018, an election was made (under s178, Income Tax (Trading and Other Income) Act 2005) in respect of the transfer to the company, such that the sum realised on ‘sale’ into the company was nil and any profit would be deferred until the property was sold by SCP. On 23 March 2017, the completed property was sold by SCP to a third party. On 19 February 2019, the partnership was registered with HMRC. Following an HMRC enquiry, RC’s self assessment return for 2016/17 was increased for capital gains tax. RC appealed. HMRC also enquired into the stamp duty land tax (SDLT) return. Subsequently, SCP appealed against the SDLT enquiry closure notice.

The First-tier Tribunal (FTT) considered (among other things) whether the partnership existed at the time of transfer of the property. The FTT concluded that the partnership had no legal reality. It existed as a planning idea in the minds of the appellants’ advisers and RC, but had no substance beyond the forms completed for it to obtain the tax result suggested by the appellant’s advisers. Thus, the elections purportedly made by the partnership had no legal effect.

Consequently, the property was not appropriated to trading stock of the partnership; the property was owned by the couple when sold to SCP on 9 June 2016. A gain arose on that sale, half of which was chargeable on RC. The FTT then considered whether the SDLT partnership legislation (Sch 15, Finance Act 2003) applied to reduce the SDLT charge on the transfer of the property to SCP to nil. The FTT concluded that SCP acquired the property from RC and his wife on 9 June 2016 for £1,583,945; SDLT was chargeable on that amount.

Establish the facts

In the absence of a written partnership agreement, evidence of the existence of a partnership is likely to be crucial. HMRC’s guidance states (at PM133000): “It is important that you establish all of the facts to determine the true relationship between the parties. This will include finding out what the intentions of the parties were. No single factor is likely to be conclusive on its own. You will need to form an overall view, based on all the facts and evidence.” The partnership in SC Properties did not have its own bank account and it was not registered for VAT; it did not issue any invoices or enter into contracts for the development of the property.

Finally, in SC Properties reference was made to the (non-tax) case Burnett v Barker [2021] EWHC 3332 (Ch), which concerned whether the claimant and defendant had carried on a business together in partnership. It was pointed out that there are various ‘normal incidents’ of partnership (eg, mutual agency), albeit they should not be treated as prerequisites to the existence of a partnership. Furthermore, partnership is a contractual arrangement, which may be express or implied. The contract terms must be sufficiently certain, so that (for example) if one person expressly declined to enter into a partnership agreement, the existence of a partnership is unlikely to be inferred from their conduct.

About the author

Mark McLaughlin, CTA (Fellow), ATT (Fellow), TEP is editor and a co-author of Tax Planning (Bloomsbury Professional)