01 Feb 2023

Anderson: partnership returns and profit share

Insights, Publications

What happens if a partnership return allocates to you a share of taxable profit which you think (or even know for sure) is wrong?

For tax years up 2017/18 the answer was that you included on your self-assessment tax return the figure that you believed to be correct, but also indicated (in the ‘white space’) the disputed figure shown on the partnership return.

For 2018/19 onwards the position changed: now the figure on the partnership return is conclusive for tax purposes not only as to what your share of profit is, but even as to whether you are a partner at all.  If you disagree, your only recourse is to refer the dispute to the First-tier Tribunal (‘FTT’).

But there’s an important limitation: no referral may be made to the extent that the dispute ‘is in substance about the amount (before sharing) of the partnership’s profits or losses for the period’.

In Anderson [2022] UKFTT 457, the first referral under the new legislation to be reported, one of the issues was the scope of that limitation.

Mr Anderson had been a partner in PricewaterhouseCoopers (‘PwC’).  He had claimed that in requiring him to retire from the partnership, PwC had unlawfully discriminated against him.  The claim had been settled by PwC’s paying him (in addition to the share of profit to which he was entitled under the partnership agreement) an ‘Additional Payment’.

In the relevant partnership return, PwC had shown the ‘Additional Payment’ as a share of profit.  Mr Anderson said that that was incorrect: it was not as a matter of fact a share of profit, but a (non-taxable) payment of compensation paid in settlement of his damages claim.

Mr Anderson accepted that, if not a share of profit, the Additional Payment would quite probably be deductible in computing PwC’s profit.  But that did not mean, he said, that the dispute was ‘in substance’ about quantifying PwC’s profit: it was ‘in substance’ about the character of the Additional Payment and any effect that the outcome of the dispute might have on the partnership’s taxable profit was simply a knock-on effect rather than what the dispute was ‘in substance’ about.

PwC, supported by HMRC, argued that if the outcome of a dispute would affect (or even, perhaps, might affect) the amount of the partnership’s taxable profit, that dispute was inevitably ‘in substance’ about the amount of the profit such that no referral to the FTT was competent.

On the face of it, that was a startling assertion. It would mean that if a partnership return characterises as a share of profit a payment made to you for services rendered, you are obliged so to treat it on your own tax return – even if you insist (or even if you could conclusively demonstrate) that you were never a partner.

Nonetheless, startling or not, the FTT accepted the proposition: the dispute between PwC and Mr Anderson was ‘in substance’ about the quantum of PwC’s profits and no referral was competent.

For more information, please get in touch with your usual BKL contact or use our enquiry form.

This article was republished in Tax Journal issue 1606 and is available on the Tax Journal website.