Trends in partnership tax enquiries

The Taxes Acts state that an enquiry is opened when a notice is provided to the partner who made and delivered the return (the nominated partner). The Rokos case concerned a judicial review by Mr Rokos, a high-net-worth individual who had invested in film finance partnerships which were later found to be ineffective tax avoidance schemes. The case focused on whether HMRC had lawfully opened enquiries into the partnership’s tax returns under s.12AC because the original partnership enquiry notices were not made to the nominated partner.

The Court examined the statutory requirements for opening a valid enquiry into a partnership return, particularly the need for HMRC to notify the partner who made and delivered the return, or their authorised agent. The Court held that, while strict compliance with notification requirements is important, notification to an authorised agent (such as the partnership’s promoters) was sufficient where those agents had actual authority to receive such notices.

For partnership enquiries this allows HMRC slightly more flexibility when issuing opening notices and removes challenges to HMRC on the grounds of enquiry administration. 

A partnership enquiry is limited in scope to items relevant to the partnership itself. To the extent that HMRC have questions regarding non-partnership related issues in individual returns, separate enquiries under s.9A should be opened or HMRC should utilise their formal information powers directed to the individuals. In either scenario the individual partner will be aware that HMRC are reviewing their personal tax affairs and they can rely on statutory taxpayer protections in respect of information requests and seek independent tax advice.

We have seen partnership enquiries in which HMRC’s opening enquiry and information requests gradually shift away from partnership matters towards personal tax issues for individual partners. Where there is an eagerness to demonstrate cooperation with HMRC, we have seen taxpayers overlook the focus of HMRC’s ongoing information requests in long running enquiries. In this context it can lead to the provision of personal tax related information which HMRC are not strictly entitled to for the purposes of the partnership enquiry. This may be a subtle change over the course of the enquiry and creates standalone risks for individual partners and/or parallel routes of enquiry which could have been avoided. 

The Salaried Member rules apply specifically to members of UK Limited Liability Partnerships (LLPs) and are designed to ensure that individuals who are, in substance, employees are taxed as such, rather than as self-employed. An individual member of an LLP is treated as a ‘Salaried Member’, and thus as an employee for UK income tax and national insurance purposes, if three statutory Conditions are met which broadly test the level of risk, reward and influence an individual has over the LLP. With these rules firmly under the spotlight we expect to see continued HMRC activity (see our previous article – “Salaried Members – updated guidance on TAAR application to Condition C”). Regular testing of these Conditions is required to demonstrate an individual’s employment status.

The mixed member rules affect partnerships (including LLPs) with both individual and non-individual (e.g. corporate) partners and specifically look to counteract arrangements where excess profits are allocated to non-individual partners. The rules allow for a reallocation of profits on a ‘just and reasonable basis’ to the individual partner. HMRC apply the rules mechanically where profits are allocated to non-individual partners where one of two Conditions are met related with profit allocation.

Whilst aimed principally at perceived tax avoidance arrangements that defer profits or allocate excessive profits to non-individual partners to secure a tax advantage, HMRC may challenge any partnership structure where they consider that the rules apply. The strict interpretation of the rules can apply to existing commercial structures and, although there are exceptions for arrangements where partners act independently and at arm’s length, these type of enquiries can be long running and forensic in nature. With recent success for HMRC in relation to these rules, we expect to see further compliance activity (see our previous article – “Upper Tribunal allows HMRC’s appeal in the BCG Partnership case”)

HMRC partnership enquiries require careful management and KPMG’s Professional Partnerships team twins partnership tax expertise with our Tax Investigation Team’s deep experience of enquiry matters to support our clients through such matters. For further information please speak to the authors or your usual KPMG in the UK contact.

For further information please contact:

• Katie Illman
• James Gorin