King and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 14 June 2016 |
| Neutral Citation | [2016] UKFTT 409 (TC) |
| Date | 14 June 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge John Brooks
Jonathan Bremner, Counsel, instructed by Robert King, appeared for the First to Eighth appellants
The Ninth Appellant did not appear and was not represented
Aparna Nathan, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – Limited Liability Partnership – Whether members of a Limited Liability Partnership entitled to declare a profit share on individual self-assessment tax returns that differ from an incorrect amount declared on the partnership self-assessment tax return – Yes – Appeal allowed.
The First-tier Tribunal (FTT) has allowed appeals by individual LLP members against assessments raised by HMRC under the Taxes Management Act 1970 (TMA 1970), s. 28A that increased the amount of each members partnership profit share in line with the share that had been allocated to them on the partnership return. The FTT found that the purpose of TMA 1970, s. 8 was to establish the correct amount of tax and the correct figure from which to establish the right amount of tax was as recorded in the members' individual returns and not the amount shown in the partnership statement.
The appellants were all members of a limited liability partnership (LLP), BTG Tax LLP (BTG), which was acquired by the firm Smith & Williamson LLP (Smith & Williamson). Following the acquisition, BTG accounts were prepared by two corporate bodies over which none of the appellants had control. The accounts showed a loss of £1.6m, however, due to an add-back' in the adjustment of profits for tax purposes, the partnership tax return showed a profit of £1.4m. The appellants did not agree with the add-back and filed their personal tax returns declaring their view of their share of BTG's profits for tax purposes. HMRC opened enquiries and issued closure notices under TMA 1970, s. 28 amending the appellants returns. The appellants appealed the closure notices on the grounds that they were entitled to declare a different profit share on their tax returns to that declared on the partnership return where they believed the figure declared on the partnership return was incorrect.
The FTT noted that the accounts which declared a loss of £1.6m had been audited by Deloitte LLP who confirmed that they gave a true and fair view of the state of BTG's affairs and of its loss and had been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice (GAAP). The adjustments in the tax computations reflected provisions for unbilled work in progress (such work in progress having been included in turnover) of £1.1m and restructuring costs of £955k, of which only £318k remained disputed by HMRC. In the partnership tax computation, these deductions were reversed and an additional amount of £1.4m was included as profits of BTG for tax purposes. Each of the partners made a white space disclosure that their profit share declared on their returns did not agree to the profit share allocated to them on the partnership return because they considered the £1.4m disallowance of provisions in the partnership return was incorrect and that the provisions were fully deductible for tax purposes.
The FTT then examined the relevant legislation and case law and relationship between a partnership tax return submitted under TMA 1970, s. 12AB and personal tax return of the individual partners submitted under TMA 1970, s. 8, in particular, noting Dr Brice's comments in Morgan; Self TAX[2009] TC 00046 that by TMA 1970, s. 8(1B), there was a statutory obligation for a partner to include in his return whatever amount was shown in the partnership statement as equal to his share of the income of the partnership. Dr Brice had also addressed the question as to what happened when the partners and the partnership did not agree noting that if the disagreement fundamentally affected the tax position, the dispute should be resolved by the tax appeal procedure. Dr Brice further noted that there were no provisions dealing with the situation where an individual partner took the view that the partnership return and partnership statement was wrong but if the partner included the amount per the partnership statement, he could not then also declare the return to be complete and correct to the best of his knowledge because he would be of the view that the amount returned was either too high or too low. Dr Brice had also observed the findings in Re Sutherland & Partners TAX[1994] BTC 183 that the statutory scheme of appeals was to be construed so as to enable any person assessed to tax to bring an appeal in respect of the assessment whether he had been assessed alone or jointly with others but under the current version of TMA 1970, s. 31, where a partner simply disagreed with the partnership statement, there would be no assessment or amendment of a self-assessment to appeal.
Dr Brice concluded that the whole of TMA 1970, s. 8 had to be interpreted in light of s. 8(1) which began by stating the purpose of the section was to establish the amount to which an individual was to be charged to tax and the amount of tax payable and what had to be established was the right amount of tax. TMA 1970, s. 8(1)(a) provided that the return must contain such information as was reasonably required and s. 8(1)(b) and 8(1B) imposed the requirement to include the amount stated on the partnership statement. Reading the section as a whole, therefore, whilst the amounts stated on the partnership statement were to be included in the return, the totality of the information referred to by s. 8(1)(a) had to ensure the return was complete and so had to include any additional information needed to supplement the partnership statement in order to establish the right amount of tax. The provision of the additional information would then enable the taxpayer to declare that the return was correct and complete (TMA 1970, s. 8(2)).
The FTT considered that although Dr Brice's comments were obiter and made in a non-binding first instance decision of the FTT, the FTT would be expected to follow the decision in another similar case unless the earlier decision was clearly wrong. Dr Brice's comments were, therefore, not to be dismissed and the FTT adopting her reasoning agreed that the purpose of TMA 1970, s. 8 was to establish the correct amount of tax.
Noting that ITTOIA 2005, s. 25 provided that profits of a trade had to comply with the Companies Act 2006 and be GAAP compliant which, in the opinion of the auditors, the accounts in this case did, the FTT concluded that there was no basis for the adjustments made by BTG and it followed that the correct figure from which to establish the right amount of tax was as recorded in each of the appellant's returns.
In terms of the right of appeal, the FTT concluded that as the amendments against which the appellants appealed were made by closure notices issued under TMA 1970, s. 28A, the appellants had an unlimited right of appeal under TMA 1970, s. 31(1)(b). Parliament could not have intended that in such a case, the persons assessed should have no right of appeal.
Accordingly, the appeals against the amendments to the appellant's tax returns made under TMA 1970, s. 28A were allowed.
This case examines this situation where an individual partner considers that the profits as declared on the partnership tax return are incorrect. In this case, the individual partners declared on their self-assessment returns amounts which differed from (and were lower than) their respective profit shares per the partnership return. The difference was due to an add-back in the adjustment of profits in the partnership return which the partners considered was properly deductible and ought not to have been added back. The FTT concluded that the accounts figure (before the add-back) was correct and allowed the partners' appeals on the basis that the purpose of TMA 1970, s. 8 was to establish the correct amount of tax and this was the amount recorded on their individual returns.
[1] The appellants were all members of a limited liability partnership (LLP) accountancy firm, BTG Tax LLP (BTG) during its accounting period ending 30 April 2011. On 26 November 2011 the business of BTG was acquired by accountants Smith & Williamson LLP (Smith & Williamson). As a result each appellant ceased to be a member of BTG and, in each case, became a member either of Smith & Williamson or another firm of accountants. Under the terms of the BTG Members Agreement the Designated Members, two corporate bodies over which none of the appellants had any control, were responsible for the preparation of BTG's accounts and tax computations. The accounts for the period ending 30 April 2011, which showed a loss of £1,628,797, were audited by Deloitte LLP who confirmed that they gave a true and fair view of the state of BTG's affairs and of its loss and had been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice (GAAP). However, as a result of an add back by the Designated Members in their tax computation, the 2011–12 partnership tax return included an amount of £1,449,862 as profits of BTG.
[2] As they did not consider there to be any legal basis for the add back the appellants filed their personal tax returns to reflect their view of the computation of their share of BTG's profits for tax purposes providing an explanation in the white space in their respective tax returns. HM Revenue and Customs (HMRC) opened enquiries into the appellants' and BTG's 2011–12 tax returns under ss 9A and 12AC of the Taxes Management Act 1970 (TMA) respectively. Closure notices were subsequently issued, under s 28A TMA, to the appellants and, under s 28B(1) TMA to BTG. The closure notice issued to BTG did not result in an amendment to its return and it did not appeal. However, the closure notices issued to the appellants, which were upheld following...
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