David Whiscombe reveals an unsatisfactory change of HMRC practice.
Partners (and members of LLPs) need to be aware of an important change of practice set out in HMRC’s guidance manuals.
It has been HMRC’s long-standing practice to accept that expenses incurred by partners (as distinct from by the partnership itself) are deductible in computing taxable profit, provided they are incurred “wholly and exclusively” for the purposes of the partnership business and otherwise meet the criteria for deductibility. In other words, what matters is the character of the expense, not the identity of the person incurring it. That sensible, and we believe correct, position has hitherto been explicit in HMRC’s published guidance to its officers:
“[It is not the case that] expenditure incurred by a partner can only be relieved if it is included in the partnership accounts. You may accept adjustments for such expenditure in the tax computations included in the partnership return providing the adjustments are made before apportionment of the net profit between the partners.”
Thus relief may be given in the partnership tax computation for costs borne by individual partners on, for example, business travel incurred personally or as “home as office” expenses; and for costs incurred by corporate partners such as remuneration of directors, provided in each case that the costs are incurred for the purposes of the partnership business (not normally a problem as that is usually the only business that is being conducted by the partner in question, jointly with the other partners).
In a complete about-turn, HMRC have deleted the guidance quoted above and now say in revised guidance:
“To be allowable as a deduction for tax purposes, the expense has to be an expense incurred (typically, paid) by the partnership”
“If the partnership does not bring the expense into the accounts, then it is not an allowable deduction”
In our view, HMRC were right before: their new guidance is based on a misreading of some obiter dicta of the Court of Appeal in Vaines v HMRC [2018] EWCA Civ 45. Nonetheless, it will be prudent to take the new guidance into account in future. In many cases this may not be onerous: it may simply be a matter of deducting what have previously been “partner expenses” in the partnership accounts and adjusting profit shares accordingly, though this may necessitate some change to partnership agreements. Indeed, the fact that the previously understood position may often be restored by dint of making some additional entries in the partnership books serves only to underline the perverseness of HMRC’s change of practice.
For more information, please get in touch with your usual BKL contact or use our enquiry form.
This article has also been published by Tax Journal and is available here on the Tax Journal website.
