Individual partners in a partnership sometimes incur business expenses personally. It has been widely accepted that tax relief can be claimed for such expenses. This could be achieved by adjusting for the expenses in the tax computation in the partnership tax return, provided any adjustment was made before the net profit was allocated between the partners.
The above treatment of expenses incurred by partners personally was previously confirmed by HM Revenue and Customs (HMRC) in its Business Income manual (at BIM82075). However, HMRC changed its guidance in January 2019 (following Vaines v Revenue and Customs  EWCA Civ 45). The commentary in BIM82075 on the above treatment of expenses was removed.
Furthermore, HMRC’s guidance at BIM82080 was subsequently amended to state (now in the Partnership manual at PIM63360):
‘A key point is that as an expense of the business carried on in partnership, the expense will normally be included in the accounts of the partnership (where the partnership prepares accounts) and deducted in arriving at the commercial profits of the partnership’.
The changes in guidance caused concern among some tax professionals that HMRC had changed its position and intended disallowing deductions for business expenses incurred by partners personally but not brought into the partnership’s accounts.
In response to those concerns, HMRC amended its guidance again in March 2019. It clarified the above paragraph in BIM82080 (now PM63360) by adding:
‘However provided an expense incurred by the partner on behalf of the partnership otherwise meets the wholly and exclusively test (and any other relevant criteria), a deduction may be allowed through the partnership return.’
It therefore appears from the above ‘clarification’ that the expense does not necessarily need to be included in the partnership’s accounts.
…or is it?
However, elsewhere in its Partnership manual, HMRC states (at PM163380):
‘If the partnership does not bring the expense into the accounts, or, if exceptionally the expense is not brought into the accounts, otherwise include it in the partnership return then it is not an allowable deduction and the individual cannot claim the expense separately. (emphasis added).
HMRC’s guidance features an example in which a business partner (Sarah) proposes an energy efficiency survey on the partnership’s residential properties, but the other two partners do not agree that the survey should be carried out. The cost of the survey is such that all three partners need to agree it. Sarah proceeds with the survey and pays for it herself. HMRC indicates that the expense is not a deductible expense of the partnership property business; nor can Sarah claim the expense against her share of partnership profits in her self-assessment return.
It is unclear (to me at least!) why the cost of the survey in the above HMRC example is not an allowable expense of the partnership’s business. There is no specific rule prohibiting a deduction for an expense simply because not all the partners agree to it; only a requirement that the expense must be ‘wholly and exclusively’ incurred for business purposes.
To put the matter beyond doubt, partners should ensure that business expenses are incurred by the partnership and included in the partnership accounts where possible.
The above article was first published in Business Tax Insider (August 2019) (www.taxinsider.co.uk).