Partnership expenses and tax: HMRC’s latest view

For tax purposes, partnerships have generally been treated as transparent, with their taxable profits instead assessed in the hands of their partners. The starting point is to calculate the taxable profits of the partnership which are then allocated out to the partners in accordance with the profit sharing arrangements for the period.

As for any entity, we therefore start by taking the accounting profits as prepared under UK accounting standards and then adjusting for specific tax rules, including the overarching condition that relief is only available for expenses incurred “wholly and exclusively” for the purposes of the trade in question.

But what if costs are incurred by a partner which relate to the partnership business? Historically, HMRC have permitted relief to be claimed thereon in the partnership tax return. Relief would not strictly be allowed by deducting the expense from the net profits allocated to the partner.

HMRC’s changing position

There have however been shifts in HMRC’s position on this matter in the past couple of years. These changes have somewhat muddied the waters.

Without warning or clear judicial precedent, the tax authorities updated their internal instructions to state that relief should only be available for costs that were included directly in the partnership’s accounts. That meant that partners would no longer be able to claim tax relief for costs borne directly by them.

Within months, HMRC had changed their position again, so as to once more allow relief for partner expenses.

Most recently though, HMRC have subtly altered their guidance to state that relief for expenditure incurred by a partner is only available to the extent that the expense has been borne “on behalf of the partnership”.

HMRC give this example:

  • In a property partnership, one of the partners wishes to undertake an energy efficiency survey of their investments.
  • Some of the other partners object, so one of the partners incurs the cost personally.
  • HMRC’s view is that as this expense has not been borne directly by the partnership and cannot otherwise be held to be an expense of its business, no tax relief can be claimed thereon.

There is thus a general concern that HMRC could dispute whether costs borne by a partner in respect of partnership business are tax-deductible. It is somewhat subjective as to whether such costs can be shown to indeed have been incurred “on behalf of” the partnership.

What we recommend

In order to avoid potential issues, we recommend that if possible, such costs be recharged and borne by the partnership. An appropriate adjustment to allocated profit shares can then be made, to ensure that this is cash-neutral to the partnership as a whole. However, this approach may not be practical in all cases, particularly if the partnership accounts are finalised before the costs of all the partners can be ascertained.

The alternative is to have a clear policy either in the partnership deed or side agreement which sets out which costs are authorised to be incurred by partners on behalf of the partnership. Indeed, such a policy is good housekeeping for businesses generally.

For more information, or to discuss your business’ specific circumstances, please get in touch with your usual BKL contact or use our enquiry form.

This article was published in Tax Journal Issue 1541 and is available here on the Tax Journal website.



Sam Inkersole

In 2022, Sam won the Taxation’s Rising Star award at the Taxation Awards in and was named in the Accountancy Age 35 Under 35.

Jon Wedge

While Jon’s client work focuses on the financial services sector, he also oversees the firm’s assurance service, as well as supporting the trainees following in his footsteps.


Elana joined us in 2017 as an ACA trainee, after graduating from Durham University where she had studied languages. She is now a manager in our assurance team.


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