Where an individual taxpayer carries on business both as a sole-proprietor and through a “partnership”, does the income of the partnership add to the individual’s taxable turnover for GST registration purposes? The UK First-Tier Tribunal (Tax Chamber) (FTT) in Dean Jason Butler v HMRC [2016] UKFTT 0666 (TC) rejected the taxpayer’s argument that part of his income was earned through a “partnership” and found him liable to register for VAT based on his combined income.

The taxpayer was a professional decorator and carpenter. He carried on business as a sole-proprietor with his personal bank account used for business purposes and invoices written under his name “D Butler”. The taxpayer was sometimes asked by clients to take on work beyond his decorating and carpentry skills, e.g. in areas such as tiling or electrical work. Previously, he had been unable to do so but in 2007, with the help of his wife (Mrs Butler), he started taking on such additional project management work. The work involved planning and overseeing the projects and Mrs Butler would assist in matters such as identifying suitable sub-contractors, preparing quotations, liaising with the sub-contractors where they had insufficient English skills for the taxpayer to communicate with them effectively, speaking with clients in relation to the sub-contractors and paying in cheques. Subsequently, Mrs Butler stopped working with the taxpayer and the taxpayer employed a PA to carry out her work.

The HMRC took the view that the taxpayer was liable to register for VAT based on the income from his decorating and carpentry combined with the income from his project management business. The taxpayer argued that he carried the project management business in partnership with Mrs Butler – it was a joint business and she was doing more than just helping him out. He further argued that he was in fact the junior partner and she was the key player. As such, the income from the project management business should not be combined with his personal income in determining if he had exceeded the threshold for VAT registration purposes.

The FTT held that the taxpayer had not discharged the burden of proof to establish that a partnership with Mrs Butler existed. Although the business was not formally labelled as a partnership and there was no evidence of a partnership agreement or an understanding about how profits would be divided, the FTT stated that these factors were irrelevant.

Instead, the FTT considered several factors (none of which by itself are conclusive) which together indicated that there was no partnership in place. First, the FTT found that the project management opportunities arose from work the taxpayer did as a decorator and carpenter. He had the client contacts and was engaged by the clients to assist them in the work beyond carpentry. Effectively he was extending his initial activities. In addition, Mrs Butler’s primary role was found to have been to identify and engage sub-contractors and handle paperwork while the taxpayer had the primary role of dealing with sub-contractors and actually managing the project on site, except to the extent that there was a language problem. The FTT also found that invoices for the project management project were issued under “D Butler” and the cheques were deposited into the taxpayer’s personal bank account, in the same manner as for the taxpayer’s personal decorating and carpentry business. Finally, the FTT found that if the project management business was intended to be a partnership, Mrs Butler, with a Masters in Law, should have considered her own tax position and reported her share of the partnership income instead of having all the income reported in the taxpayer’s income tax return.

As such, the FTT found the taxpayer liable for VAT registration.

Editorial Note

The FTT’s decision in this case was made on the basis that there was a lack of evidence that a partnership existed in relation to the project management business. It would thus be prudent for taxpayers which intend to carry out a portion of their business in the form of a partnership, to take measures to ensure that the partnership is properly accounted for, to avoid situations where the threshold for GST registration is unknowingly exceeded or where the partnership is regarded as part of a GST-registered main business. For instance, at the very least, the partnership could be registered. Steps should also be taken to segregate the finances and activities of the partnership from the taxpayer’s main business.