What should a partner put on his or her tax return, if he or she disagrees with the partnership's overall tax return?
Several members of BTG Tax LLP disagreed with the partnership’s return reporting a significant profit. Instead of using the partnership return’s figure, they submitted their tax returns showing that the partnership had made a loss that year. HMRC amended their returns to bring them in line with the partnership return, with a corresponding tax bill. The partners appealed to the FTT, which held that the taxpayers' view of the accounts was correct and so they could file returns on that basis.
BTG Tax LLP was a firm of accountants consisting of a mixture of individual and corporate partners. Under the partnership agreement, preparing and submitting the firm’s accounts was the responsibility of two corporate partners. The accounts for the period up to 30 April 2011 showed an initial profit of £440,675. The partners' remuneration took the form of "fixed profit shares". Once these were deducted, the accounts showed a loss of £1,628,797. The accounts were audited by Deloitte LLP, who confirmed that they were accurate and complied with "Generally Accepted Accounting Practice" (GAAP). However, before submission, the partners in charge of the accounts included an "add-back" in the calculations, giving a total profit of £1,449,862. This was the figure that was submitted to HMRC in the partnership return.
Various individual partners took issue with this change and so prepared their personal tax returns with a different set of figures. The partners used the initial profit in the accounts approved by Deloitte as the basis for their calculations. This gave significantly lower figures than the partnership return, which they entered in their personal tax returns as their shares of the partnership's profits. They also put included explanations in the "white space" setting out how and why their figures differed from the partnership return. HMRC opened enquiries, concluded that they had understated their share of the profits and amended the figures in their returns to be in line with the partnership returns.
The critical issue in this case was the interpretation of section 8 Taxes Management Act 1970 (TMA). HMRC argued that this provision imposed a statutory duty on the partners to use the figures from the partnership's accounts when listing their profit shares in their personal tax returns.
The appellants' counter-argument was that the purpose of section 8 TMA was to identify the correct amount of tax that was due to HMRC. If a partner is aware that the partnership return contained errors meaning that it understated its tax liability then that partner would have to include a higher figure in their personal return. Otherwise they would be at risk of a penalty. The appellants took the view that the same logic should apply to the reverse position, where an error leads to an overstatement of the tax liability.
HMRC attempted to counter this by arguing that partners have an obligation to ensure that the partnership return is correct before it is submitted. They suggested that the partners should have resolved their concerns with the corporate members' calculations internally, since once the partnership return had been submitted, its figures were binding. If this proved impossible then the partners were under an obligation to follow the partnership return in listing their profit shares, though they could use the "white space" to set out alternative figures and their arguments for using those instead.
The FTT took the view that the legislation was not clear-cut, citing a previous case, which stated that the provisions "do not slot easily into place". Therefore the FTT considered the purpose of s.8 TMA, concluding that it was, as the appellants argued, to determine the correct amount of tax due. The appellants' view of the accounts was in line with that endorsed by Deloitte as being compliant with GAAP. Therefore the partners’ personal returns represented the correct amount of tax due and the FTT upheld their appeal against HMRC’s amendments.
The FTT took the view that individual partners can submit their own figures in their personal returns where they disagree with the partnership return. The FTT did not go on to discuss what should be included in the “white space” in these circumstances. However, the FTT did state that a return must include the additional information which "may reasonably be required." It is advisable to follow the example of the appellants and include any alternative figures and explain the discrepancy in the “white space”.
As well as clarifying that partners are not necessarily bound to follow the figures on their partnership return, this case is a useful reminder that where legislation is unclear the courts will look to the ultimate purpose behind it.