It will normally be straightforward to identify the existence of a partnership; the parties will invariably deliberately join together to form one. However, in practice life is not always so simple. For example, a joint venture may take on some characteristics of a partnership. HM Revenue & Customs (HMRC) may contend that a business is carried on in partnership, where there is no formal partnership agreement.
In Phillips v CRC  UKFTT 335 (TC) TC00276, one of the issues was whether a working arrangement between two architects constituted a partnership, as HMRC contended. The First-tier Tribunal held on the particular facts of the case that a partnership existed. In doing so, the tribunal provided a useful summary of factors to consider in determining whether a partnership exists.
Law and guidance
It seems quite remarkable in this climate of legislative change that the starting point on partnerships is to consider law which is over 120 years old. The Tribunal in the Phillips case cited the statutory definition of ‘partnership’ in the Partnership Act 1890. Section 1(1) states: “Partnership is the relation which subsists between persons carrying on a business in common with a view of profit”. This is also a starting point of HMRC’s guidance on partnerships, in the Business Income Manual.
A mere assertion that a partnership exists is not conclusive evidence if there is no supporting evidence. However, even if a partnership agreement exists, HMRC do not consider this to be conclusive evidence in its own right (BIM72005). HMRC refers to section 2 of the Partnership Act 1890, which contains rules for determining the existence of a partnership. That section states that the sharing of gross income does not create a partnership (s 2(2)). By contrast, the receipt of a share of net profits is prima facie evidence of being a partner, although it is not conclusive in itself (s 2(3)).
The tribunal in the Phillips case considered that it was “very relevant” to consider whether the agreement between the two architects was to share gross revenues (which it considered would be a joint venture and not a partnership) or to share net revenues. The tribunal found on the facts that profits and not merely revenue were shared between them.
The tribunal went on to consider various other factors in considering whether a partnership existed. This may provide a helpful list of points in determining whether a partnership exists in other cases:
- Profit sharing – As indicated, the sharing of net profits (as opposed to gross income) is prima facie evidence of the existence of a partnership, although other evidence can displace it.
- Letterheads, etc – Business stationery indicating the parties to be partners may be persuasive evidence.
- Power to bind – If one of the parties has the power to bind the firm in its business with others, this is indicative of a partnership, unless that party has no authority to act for the firm in a particular matter (see PA 1890, s 5).
- Lack of trust – The tribunal in Phillips held that secretiveness between the parties was not necessarily inconsistent with the existence of a partnership, although it may be grounds for a party to terminate it.
- Competition – The tribunal noted that the Partnership Act provides for the duty of a partner not to compete with the firm, but held that this did not necessarily mean that there was no partnership in the circumstances of this case.
- Sharing losses – It was contended in Phillips that an agreement to share profits but not losses was inconsistent with partnership (nb the tribunal held that the loss sharing arrangements were inconclusive in this case).
- Professional indemnity (PI) insurance – The PI arrangements of the parties was considered in the Phillips case.
- Warranty deed – An architect warranty deed between a customer and the alleged partnership was produced as evidence in the Phillips case (although unfortunately for the taxpayer it related to the wrong period).
- VAT registration – The question of whether the business was VAT registered was considered in Phillips.
- Previous bad experience – The appellant in Phillips had been involved in another partnership which ended badly. However, the tribunal held even if he would have been reluctant to enter into another partnership, this did not mean that the relationship in question was not a partnership.
- Profit share – It was pointed out in Phillips that the appellant did not get a 50:50 share in the profits. However, the tribunal held that an unequal share of profits is not inconsistent with a partnership.
- Sale of part of business – The other ‘partner’ (Mr Blintiff) sought Mr Phillips’ consent to sell part of the business, which is consistent with a partnership (however, the tribunal noted that he did not account to Mr Phillips for any of the sale proceeds, which triggered the end of the relationship). The tribunal did not consider this to be particularly strong evidence of the existence of a partnership.
- Views of the parties – Mr Phillips had sought to argue that there was a partnership when suing Mr Blintiff for a share of the business capital (but later maintained that there was no partnership when HMRC raised assessments as such). The tribunal considered that any view taken by Mr Phillips during the period in question (i.e. before his dispute with Mr Blintiff) to be of relevance, as “…a businessman can be expected to have a fair idea of whether he is in business with another person with a view to making money”.
- Partnership tax returns – Partnership returns were submitted to HMRC for the business. The tribunal considered the existence of partnership returns to be of value in showing that the signatory (Mr Blintiff) believed at the time that it was correct to make the return on the basis that the relationship was a partnership.
- Partnership accounts – Accounts for the partnership were produced. Some sets of (draft) accounts were produced after the ‘partnership’ ceased to exist. The tribunal did not find them of any use in showing whether or not a partnership existed. However, it was considered relevant that one of the parties (Mr Blintiff) had instructed accountants to prepare partnership accounts.
- Individual tax returns – The tribunal in Phillips found it to be “of even more relevance” than the partnership accounts that the appellant’s tax returns disclosed the existence of the partnership, and that they had indicated that he was a partner.
The tribunal concluded that Mr Phillips and Mr Blintiff shared net profits and that this was prima facie evidence of a partnership between them.
HMRC will no doubt point out that the existence of a partnership or otherwise depends on the specific facts of each case. However, the above list of indicators from the Phillips case should provide a useful ‘aide memoire’ of potential issues to consider.
The above article is reproduced from ‘Practice Update’ (November/December 2010), a tax Newsletter produced by Mark McLaughlin Associates Ltd. To download current and past editions of Practice Update, see the Newsletters section.