Mark McLaughlin points out that determining whether a partnership exists is not as straightforward as some may think.
It can sometimes be difficult to identify whether a business carried on by two or more individuals constitutes a partnership.
The legal definition of ‘partnership’ (in Partnership Act 1890, s 1) is: ‘the relationship which subsists between persons carrying on a business in common with a view to profit’. In England, Wales or Northern Ireland, a partnership is not a legal person, but under Scottish law partnerships have distinct legal personality.
Partnership Act 1890 contains rules to assist in determining whether a partnership exists. However, uncertainty can still arise, which has resulted in case law over the years (e.g., Burnett v Barker [2021] EWHC 3332 (Ch)). There are several types of partnership, but this article focuses on general (or ordinary) partnerships.
It ain’t necessarily so!
In practice, it is sometimes difficult to establish the existence of a business partnership between spouses (or civil partners). A written business partnership agreement between spouses is (perhaps understandably) less common than between unrelated parties. An oral assertion that a partnership exists does not necessarily mean HM Revenue and Customs (HMRC) will agree, especially if there is no supporting evidence.
For example, in SC Properties Ltd & Anor v Revenue and Customs [2022] UKFTT 214 (TC), a married couple bought a property in 1989 for around £515,000. In 1997, a company (SCP) was incorporated (owned in equal shares by the spouses), primarily as a property development company. In September 2014, planning permission was first granted for the development of the property (then worth £256,794) and the spouses purportedly created a partnership to develop the property, which was appropriated to trading stock of the partnership. In June 2016, the property was transferred to SCP; £830,000 was credited to the couple’s director’s loan account with SCP in consideration for selling the property (which was then valued at £1,583,945). In March 2017, the completed property was sold by SCP to a third party for £1,875,000.
In February 2019, the partnership was registered with HMRC. A dispute arose with HMRC about whether: (1) the partnership existed at the time of the transfer of the property and whether certain CGT elections were validly made; (2) the stamp duty land tax (SDLT) partnership provisions applied to reduce the SDLT charge on the transfer of the property to SCP to nil. On appeal, the First-tier Tribunal concluded that the partnership had no legal reality. It existed as a planning idea but had no substance beyond certain forms which were completed for it to obtain the tax result suggested by the couple’s advisers. Consequently, the CGT elections made by the ‘partnership’ had no legal effect. The property was owned by the couple when it was sold to SCP in June 2016; a chargeable gain arose on that sale. Furthermore, SCP acquired the property from the couple in June 2016 for chargeable consideration of £1,583,945 and SDLT was chargeable on that amount.
Help yourself
The spouses in SC Properties perhaps did not help themselves. The business did not have its own bank account; it was not registered for VAT; and it did not issue any invoices or enter into contracts for the development of the property.
HMRC’s guidance in its Partnership manual 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.”
Practical tip
In the absence of a written partnership agreement, evidence of the existence of a partnership is likely to be crucial.
