Partners’ expenses - HMRC confirms no change of policy

16 July 2019

In January 2018, in the Vaines v HMRC case, the Court of Appeal ruled that an expense claimed by a partner in his personal self-assessment return was not deductible from his partnership profit share, as it was not incurred wholly and exclusively for the purposes of the trade of that partnership. (It related to the trade of a former partnership in which the individual had been a partner).

In November 2018, HMRC updated its Business Income Manual, in an attempt to clarify its guidance in line with the Court of Appeal’s decision. However, the new guidance could have been interpreted as meaning that no deduction would be allowed for any expenses claimed outside partnership accounts.

Fortunately, following representations from the profession, HMRC has confirmed that this was not its intention, and has revised its guidance (now moved to its Partnership Manual) at PM163360, as follows:

“To be allowable as a deduction for tax purposes, the expense has to be an expense incurred (typically, paid) by the partnership for the purpose of the trade or property business carried on by the partnership or LLP, and meet the normal tests for being allowable for tax purposes.

Ordinarily, a partnership expense will be paid directly from partnership funds. The starting point when a partner pays something on behalf of the partnership is they will normally then be reimbursed by the partnership from partnership funds. The partner cannot claim the expense against their share of the profits in their individual return.

A key point is that as an expense of the business carried on in partnership, the expense will normally be included in the accounts of the partnership (where the partnership prepares accounts) and deducted in arriving at the commercial profits of the partnership. However, provided an expense incurred by the partner on behalf of the partnership otherwise meets the wholly and exclusively test (and any other relevant criteria), a deduction may be allowed through the partnership return; the expense met by the partner will be deemed to have been incurred by the partnership.

There may also be rules in the partnership/LLP agreement setting out how the partners will agree that an expense is a partnership expense.”

This clarification is welcome, but advisers will need to make clients aware that tax relief for any allowable expenses paid by partners (where it is impractical for these to be included in the partnership accounts) may only be claimed through the partnership tax return.

For further information, or for assistance, on this or any other partnership matter, please contact Jeffrey Webber.

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