Partnership Enquiries and Partnership Statements

A partnership is not a taxable person, which produces an enquiry regime unlike anything else in self-assessment. One partner runs the appeal. Every partner is bound by it. And a s12AC enquiry reaches into each partner’s own return whether or not their window is still open.

Why Partnership Enquiries Work Differently

A partnership is not a taxable person for income tax or corporation tax. It files a return, but the tax is charged on the partners individually. That structural feature produces an enquiry and appeal regime which is distinct from anything else in the self-assessment system, and which catches out advisers who approach it as though it were an ordinary enquiry.

The Statutory Framework

• s12AA TMA 1970: the notice requiring a partnership return, given to the representative partner or successor.
• s12AB TMA 1970: the partnership statement, which sets out the partnership’s income, losses and other amounts, and each partner’s share.
• s12AC TMA 1970: the power to enquire into a partnership return. Critically, an enquiry into the partnership return is deemed to include an enquiry into each partner’s own return so far as it relates to the partnership.
• s28B TMA 1970: the closure notice for a partnership enquiry, and the amendment of the partnership statement.
• s50(9), and the related provisions: the flow-through of an amendment to the partnership statement into each partner’s self-assessment.
• s12ABZB TMA 1970: the mechanism by which an amendment to the partnership statement is reflected in the partners’ returns, and the associated notification requirements.

Who Can Appeal, and Who Is Bound

This is the feature with the most serious practical consequences.

• The representative partner conducts the appeal. An appeal against an amendment to the partnership statement is brought by the partner who made the return, or their successor.
• All partners are bound by the outcome. A partner who took no part in the appeal, disagreed with how it was run, or was not told about it, is nonetheless bound.
• Individual partners cannot generally litigate the same point separately. The scheme is deliberately designed to produce a single determination binding on everyone, to avoid inconsistent outcomes across the partners.

Why this causes real difficulty

The interests of partners frequently diverge, particularly where:

• a partner has left, and the continuing partners are conducting the appeal;
• the partners have different marginal rates or loss positions, so the same adjustment costs them very differently;
• the dispute concerns conduct attributable to one partner;
• the representative partner has a personal reason to settle quickly, or to fight on;
• the partnership has dissolved and nobody is actively running the appeal.

A partner in that position has limited options, and they need to be exercised early.

Protecting an Individual Partner

1. Find out whether an enquiry is open. Partners are frequently unaware that a partnership enquiry has been opened, because the notice goes to the representative partner. Ask, in writing, and repeat the question annually.
2. Get sight of the correspondence. A partner who cannot see what is being said on their behalf cannot protect themselves.
3. Address it in the partnership agreement. A well-drafted agreement provides for how tax enquiries and appeals are conducted, who instructs advisers, how costs are shared, what consultation is required before settlement, and what happens after a partner leaves. Most agreements are silent.
4. Consider a separate adviser where interests genuinely diverge, even though that adviser cannot run a separate appeal.
5. Watch the partner’s own position on non-partnership items. The deeming extends only to the partnership items. Anything else in the partner’s return has its own enquiry window and its own appeal rights.
6. Check the amendment when it arrives. The flow-through into the partner’s self-assessment is mechanical, and mechanical processes go wrong. Verify the figure and the year.

Closure and Scope

The closure notice for a partnership enquiry amends the partnership statement, and the amendment then flows through. Two points follow.

First, an application can be made to require HMRC to close a partnership enquiry, in the same way as for an individual enquiry. Where an enquiry has drifted, that is the remedy: see our resource on closure notice applications.

Second, the scope of the appeal is fixed by the conclusions stated in the closure notice, but HMRC is not confined to the grounds it originally advanced within that subject matter. The reasoning in Tower MCashback applies, and preparation should anticipate arguments HMRC has not yet made.

Penalties and Behaviour

• Late filing penalties for a partnership return are charged on each partner, which multiplies a single administrative failure across the partnership.
• Inaccuracy penalties under Schedule 24 FA 2007 are assessed by reference to each partner’s position, and the behaviour analysis is applied to the partner whose conduct caused the inaccuracy.
• The behaviour of one partner should not automatically be attributed to the others. Where an inaccuracy arose from the conduct of a single partner, the others should resist a deliberate finding against them personally, under HMRC v Tooth and Auxilium the test is about that person’s knowledge and intention.
• Reliance on the representative partner may found a reasonable excuse for another partner, applying the four stages in Perrin and the reasonable care requirement where reliance on another person is in issue.

LLPs and Other Structures

An LLP carrying on a business with a view to profit is generally treated as a partnership for these purposes, so the same enquiry machinery applies. But an LLP brings its own overlay:

• The salaried members rules, which can recharacterise a member as an employee with PAYE falling on the LLP: see HMRC v BlueCrest.
• The mixed membership rules, where individual and corporate members are involved.
• Salaried member and status questions arising together, which are analytically distinct and should be answered separately.

Frequently Asked Questions