Partnership Expenses And Tax: HMRC's Latest View

• Published date: 07 September 2021
• Subject Matter: Accounting and Audit, Tax, Accounting Standards, Tax Authorities
• Law Firm: Berg Kaprow Lewis
• Author: Mr Anthony Newgrosh

For tax purposes, partnerships have generally been treated as transparent, with their taxable profits instead assessed in the hands of their partners. The starting point is to calculate the taxable profits of the partnership which are then allocated out to the partners in accordance with the profit sharing arrangements for the period.

As for any entity, we therefore start by taking the accounting profits as prepared under UK accounting standards and then adjusting for specific tax rules, including the overarching condition that relief is only available for expenses incurred 'wholly and exclusively' for the purposes of the trade in question.

But what if costs are incurred by a partner which relate to the partnership business? Historically, HMRC have permitted relief to be claimed thereon in the partnership tax return. Relief would not strictly be allowed by deducting the expense from the net profits allocated to the partner.

HMRC's changing position

There have however been shifts in HMRC's position on this matter in the past couple of years. These changes have somewhat muddied the waters.

Without warning or clear judicial precedent, the tax authorities updated their internal instructions to state that relief should only be available for costs that were included directly in the partnership's accounts. That meant that partners would no longer be able to claim tax relief for costs borne directly by them.

Within months, HMRC had changed their position again, so as to once more allow relief for partner expenses.

Most recently though, HMRC have subtly altered their guidance to state that relief for expenditure incurred by a partner is only available to the extent that the expense has been borne 'on behalf of the partnership'.

HMRC give this example:

• In a property...