A recent case at the First-Tier Tribunal, DJ Butler v HMRC, highlighted again the benefits of taking professional advice in good time. The taxpayer operated as a sole-trader working as a decorator, project manager and carpenter.

In the absence of the project management turnover the taxpayer would have been below the VAT registration threshold. After HMRC identified that his turnover was above the limit, the taxpayer argued that the project management was run as a partnership with his wife; however he had always declared it on his individual self-assessment tax returns as sole trader turnover.

The Tribunal considered that the project management work should rightfully be considered an extension of his sole trader activities and that no partnership existed. It did not help that no profits were reported on his wife’s tax returns, and nor were there separate partnership bank accounts or sales invoices raised in its name. The taxpayer’s appeal was therefore dismissed.

It would appear that if the taxpayer had taken steps in advance to create a separate legal entity for the project management, whether a partnership or a company, and followed the correct reporting and legal steps, the planning may have been effective. As it was, it was difficult to argue that self-assessed sole-trader income was in fact from a partnership.

Taking professional advice in advance would have helped this taxpayer, is there anything we can help you with?

In this article on Partnership Tax, we will take a look at some of the latest developments in practical tax matters relating to Partnerships. 

Incorporation of a Business within an LLP

The increased usage of LLPs as business vehicles has raised thoughts over how a business owned by an LLP could be transferred to a company.

Routes for incorporation must be carefully considered and options include transferring the business of the LLP to the company or transfer of the members’ interests to the company.   Generally commentators opinion is that HMRC are indifferent to the structure utilised but the incorporation relief rules regarding CGT must be reviewed thoroughly in the planning phase.

Also solicitors should be consulted to make sure implementation is carried out properly.

Incorporation Relief

Key tests for the relief from capital gains tax include whether a business is being operated and whether the whole business is transferred.

The Tribunal Case of Elizabeth Ramsey looked at whether a property portfolio could be a business.  The Tribunal Judges held that in her case, it wasn’t a business, but there is some doubt as to whether this decision was appropriate.  It isn’t binding given that it was a Tribunal case.

SDLT on Incorporation

It is thought that there could be an interpretation of the current rules where SDLT is avoided on the transfer of a property as part of a business from a partnership to a limited company.  Such an interpretation may be in contravention to HMRC’s view and specific written advice should be obtained.

Certainly conversation to a partnership business from a sole trader and then incorporation could be caught by anti-avoidance rules.

Corporate Partner

Consideration of the introduction of a company into a  partnership of natural persons is still a consideration in terms of allowing a structure that works commercially for a business.

If commercial reasons dictate that a company would be a useful partner then tax savings might be achieved, especially as we are still to have a highest rate of income tax of 45% + 2% NI.

It is important to note that the introduction of a company needs bespoke consideration and could cause difficulties  in terms of partnership succession, unless a careful plan is set out.  There are a number of different options under which a company could interact with a partnership.

Top Tax Tips for Owner Managed Businesses
2. EMI Share Option Arrangement
Enterprise Management Incentive (EMI) share option schemes are a tax efficient way in which to retain and recruit key employees by offering them the opportunity to acquire a stake in their employing company.
The terms of the option are personalised to the company’s specific circumstances and may include performance requirements and / or time constraints that must be met before the employees can acquire the shares.  The employees’ acquisition of shares is very tax efficient for them.
The advantages to the business owner are that staff incentivisation will not cost the business cash, as a bonus would. Also, if the company’s value increases they may be able to withdraw money from the business at a rate of tax that is effectively less than 10%