The tax affairs (and, more specifically, the tax returns) of Partnerships and Partners continue to create more than their fair share of controversy and procedural dispute. The latest is the First-tier Tribunal decision in Grinyer [2020] UKFTT 0064 (TC).
Partnerships (and LLPs treated as partnerships, as most are) file tax returns stating both the amounts of partnership income as adjusted for tax purposes and how that income is allocated between partners. Partners in turn are required to state on their personal tax returns the amounts allocated to them in the partnership return. (What happens if the partner disagrees with the amount so allocated is an interesting digression, but one which we won’t follow here.)
In the normal run of things, if HMRC wish to ask questions relating to partnership affairs, they issue an enquiry notice in respect of the partnership return. That is deemed also to open an enquiry into the return of each partner (but only, case law has decided, into those aspects of the partner’s return that bear upon the partnership: if HMRC want to ask questions about other aspects of a partner’s tax affairs they must also open a “real” enquiry that sits alongside the “deemed” enquiry).
Mr Grinyer was a member of a partnership. The partnership had filed a tax return showing a trading loss, of which £422,312 was allocated to Mr Grinyer. He duly included that amount on his personal tax return and claimed tax relief: he claimed to set £25,000 (the maximum amount possible in the circumstances) against his other income and to carry forward the balance of £397,312.
HMRC at no point opened any enquiry into the partnership return. They did, however, open an enquiry (that is, a real one, not a deemed one) into Mr Grinyer’s tax return, challenging the availability of tax relief for the loss, on the grounds that the partnership was not carrying on a trade on a commercial basis, if at all. Mr Grinyer asserted that HMRC had no power to question his claim by enquiring into his personal tax return: any challenge to the partnership figures must be made, if at all, by enquiry into the partnership return.
Mr Grinyer lost his case. HMRC’s powers of enquiry are very wide and the Tribunal was persuaded (quite correctly, in our view) by HMRC’s argument that “The Appellant is conflating two issues, namely, how a partner’s share of partnership profit and losses is determined, and when, and whether, a partner is entitled to set his share of partnership losses against general income.” (Though in fact HMRC’s challenge extended not only to the offset against general income but also to the carry-forward claim.)
That did for Mr Grinyer. But what if he had not been claiming relief for losses but had been reporting on his tax return a share of partnership profits? Would it then have been possible for HMRC to open an enquiry into his return without having enquired into the partnership return?
No. That would amount to questioning “how a partner’s share of partnership profit and losses is determined”: the only way that that can be challenged is by enquiring into the partnership return. Or, as the Tribunal put it:
“We agree with HMRC that that” [sc., the observations of the Supreme Court in a case cited] “means that although they cannot go beyond checking the accuracy of the figure in Boxes 7 and 19, since that figure must comply with the provisions of Section 8(1B), they can enquire into literally anything else including a claim for loss relief.”
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This article was also published by Tax Journal and is available on the Tax Journal website.