Executive Summary

The recent decision of the First Tier Tribunal (FTT) in the unusual case of R. Ashton v HMRC [2016] UKFTT 727 serves as a useful reminder to taxpayers of two issues: (1) the potential for confusion when distinguishing between general partnership and employment for tax purposes; and (2) the potential conflict between the legal and commercial reality/intention of the relationship and the relevant documentation.

How Did the Confusion Arise?

The owner of a business converted his enterprise into a partnership and named several of his former employees, including Mr. Ashton (Taxpayer), as partners. Partnership returns were submitted to HMRC and the Taxpayer submitted self-assessment returns on the basis that he was a partner.

HMRC opened an enquiry in response to a discrepancy in the tax returns relating to the profit share declared, among other things. The documentation and evidence submitted to HMRC appeared to indicate that the Taxpayer was a partner, including the partnership's returns, tax returns submitted by the Taxpayer and payments of income tax and National Insurance Contributions made by the Taxpayer. HMRC concluded that assessments should be raised against the Taxpayer on the basis that he was a self-employed partner, rather than as an employee. However, in challenging HMRC's assessment against him, the Taxpayer then sought an appeal to the FTT on the basis that he was, in fact, an employee.

Clarity Restored

The Taxpayer's appeal was successful. The FTT looked beyond the position indicated in the documentation and found that, on balance, the facts pointed to the Taxpayer being an employee. He did not meet the test (under the Partnership Act 1890) of "carrying on a business in common with a view of profit." The relevant factors considered by the FTT included the fact that the Taxpayer had not executed the partnership agreement and the fact that he had no access to, nor control over, the partnership accounts. A template of a partnership agreement had been submitted to HMRC, but it did not include details of the business or the partners, and the Taxpayer had not received a copy. The Taxpayer did not take part in partnership meetings and it was found that he did not take on financial risk (as he was entitled to a basic salary each month and a bonus amount linked to achieving a particular turnover). He did not exercise control over the content or mode of execution of his work. While the Taxpayer was expected to meet most of his business expenses on his own account rather than having such expenses met by the partnership as a whole, the FTT determined that this fact, of itself, was not indicative of partnership status. In summary, the Taxpayer was not "carrying on business in common" with anyone.

Getting the Facts Straight

The Ashton case illustrates how an accepted filing position can be overturned and is a cautionary example of how care must be taken in ensuring that the status claimed by taxpayers is sufficiently well-supported by the facts.