partnership agreement
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The case of Mrs Pauline Valantine v HMRC (TC 01644) demonstrates that in certain cases it may be useful to engage in discussions/meetings with HM Revenue and Customs as this could prevent cases being taken to Tribunal unnecessarily.
The key issue in the case concerned whether Mrs Valantine was in partnership with her husband.  If Mr & Mrs Valantine were in partnership then Mrs Valantine would become liable for unpaid income tax/NICs on her share of the partnership profits and unpaid VAT for which she would be joint and severally liable.
The question of liability was particularly relevant because Mr Valantine was expected to declare bankruptcy, therefore if a partnership did not exist then Mrs Valantine would not be liable for the unpaid tax and HM Revenue and Customs could not expect to receive payment.
Based on the evidence before them the Tribunal found in favour of the taxpayer on the basis that the relationship between the taxpayers made it unthinkable that they would have entered a business partnership.
Interestingly however, the Tribunal concluded that HM Revenue and Customs should not be criticised for their handling of the case or for bringing the case to Tribunal.  They went on to say that had the taxpayers been willing to meet HM Revenue and Customs to discuss the case then the case may never had been brought to appeal.
Taxpayers involved with investigations/enquiries from HM Revenue and Customs may find professional advice useful to ensure that matters are concluded both quickly and robustly.
For information regarding our tax investigation/enquiry services please contact Paul Davison on 0113 244 3502 or visit our website www.eavesandco.co.uk

 HM Revenue & Customs (HMRC) raised assessments to PAYE and NIC’s for the years 1998/99 to 2006/07 totalling £3.6m on the basis that the consultants were employees of the taxpayer.

The taxpayer supplied individuals for counter and promotional work to major cosmetic companies at duty free shops at airports. It had a database of 100 individuals (consultants) upon which to call upon. The taxpayer was under no obligation to offer the consultants work and the consultants were under no obligation to accept work offered. In addition there were no formal contracts between the taxpayer and the cosmetic company or consultants.

Talentcore Ltd successfully appealed HMRC’s assessment to the First Tier Tribunal (FTT). HMRC then appealed to the Upper Tier Tribunal (UTT) challenging the FTT’s application of ITEPA 2003 s.44.

The rules state that the consultants would not be deemed to be employed by the taxpayer for Income Tax and NIC’s, if the individual was not:

 (a) Providing, or under an obligation to provide personal services; or

 (b) Subject to (or to the right of) supervision, direction or control.

The Tribunal found the consultants had complete freedom to arrange for substitutes if they wished. This amounted to an unfettered right to substitution. Therefore condition (a) was met as the consultant was not obliged to perform the services personally.

 The Judge dismissed HMRC’s appeal saying “Since the First Tier Triubunal held, correctly in my judgment, that the terms of the contract did not oblige the consultant to provide the services personally, it is not an ‘agency contract’”.

The case shows if it is possible to structure contracts so that either or both of the conditions (personal service and supervision) are not met, then PAYE and NIC obligations can be avoided when providing temporary workers.

A company created two employee benefit trusts for its employees.
After the sale of the parent company for £39 million, cash payments were made to certain employees by the trustees at the end of October 2002, October 2003 and February 2004. These payments were based on the company’s bonus structure and length of service.
HMRC decided that the company should pay primary and secondary class 1 National Insurance contributions on the payments made to the employees. The company appealed this ruling and claimed that the payments were gratuities and should be exempt from National Insurance under Social Security (Contributions) Regulations 2001 Sch 3 para 5.
The First-tier tribunal stated that a gratuity in this situation was a payment given voluntarily in recognition of services rendered and the amount given depended on the donor.
The payments made to the employees were considered individually in order to see if they satisfied the gratuity test.
The company’s appeal was allowed as a result of the payments being gratuities as the trustees were not obliged to make the payments and the amount was at their discretion.