Introduction

Case: Phillips v. The Commissioners for Revenue & Customs ([2009] UKFTT 335 (TC))

Court: First-tier Tribunal (Tax)

Date: 24 November 2009

This case involved Raymond John Phillips (the Appellant), who appealed against HMRC's (Her Majesty's Revenue and Customs) tax assessments for multiple years. The primary issues revolved around whether a genuine partnership existed between Phillips and Philip J. Bintliff, and if so, whether Phillips, as a non-nominated partner, could challenge the tax assessments and amendments made based on partnership returns submitted by Bintliff.

Summary of the Judgment

The First-tier Tribunal was tasked with determining two preliminary issues:

1. Whether a partnership existed between Phillips and Bintliff.
2. If a partnership did exist, whether Phillips could appeal against the tax assessments and amendments made based on the partnership's tax returns.

After a detailed examination of evidence, including tax returns, partnership accounts, and related correspondence, the Tribunal concluded:

• A partnership did exist between Phillips and Bintliff for the years in question (1998-2003).
• Phillips, despite not being the nominated partner, had the right to appeal against HMRC’s tax assessments and amendments.

Analysis

Precedents Cited

The Tribunal considered several precedents to evaluate the existence of a partnership:

• Walker v Hirsh (1884) 27 ChD 460: This case involved profit sharing without the formation of a partnership due to specific contractual terms, such as fixed salaries. The Tribunal distinguished Phillips’ case, noting the absence of such arrangements that would negate a partnership.
• Horner v Halstead [1995] 67 TC 439: Here, an individual was treated as a partner due to involvement in management and profit sharing, despite being regarded as an employee. The Tribunal found this not directly applicable to Phillips’ case.
• Morden Rigg & Co and R B Eskrigge & Co v Monks (1923) 8 TC 450 and Fenston v Johnstone (1940) 23 TC 29: These cases established that partnerships can exist without explicit intent if statutory definitions are met. However, the Tribunal found these less relevant due to the absence of evidence showing an intent to avoid partnership formation.

Legal Reasoning

The Tribunal’s legal reasoning was grounded in the Partnership Act 1890 and the Taxes Management Act 1970 (TMA 70). Key points included:

• Partnership Definition: Under the Partnership Act 1890, a partnership exists when persons carry on a business in common with a view to profit. Sharing net profits was viewed as prima facie evidence of partnership.
• Evidence Evaluation: Despite the lack of direct testimony from either partner, the Tribunal relied on tax returns, letters, and the Tomlin order settlement, which implicitly recognized the partnership.
• Appeal Rights: TMA 70’s provisions indicate that any partner, not solely the nominated partner, has the right to appeal against tax assessments affecting their personal tax returns. The Tribunal emphasized that statutory interpretation should not limit these rights.

Impact

This judgment has significant implications for partnership taxation:

• Affirmation of Non-Nominated Partners’ Rights: It establishes that partners who are not the nominated partner still retain the right to challenge tax assessments and amendments related to partnership returns.
• Clarity on Partnership Existence: The decision reinforces that sharing net profits is strong evidence of a partnership, unless conclusively disproven by other substantial evidence.
• Tribunal Jurisdiction: It broadens the scope of who can invoke appeals within the tax tribunal framework, ensuring that all partners have avenues to contest tax liabilities.

Complex Concepts Simplified

Partnership Definition

A partnership exists when two or more individuals carry out a business together with the intention of making a profit. The Partnership Act 1890 provides guidance on identifying a partnership, primarily focusing on the sharing of net profits.

Nominated Partner

In the context of tax, the nominated partner is the individual designated to represent the partnership in dealings with HMRC. This partner is responsible for submitting partnership tax returns and receiving communications from HMRC regarding the partnership’s tax affairs.

Tomlin Order

A Tomlin Order is a type of consent order used in English law to settle a dispute out of court. It typically includes terms agreed upon by both parties, which are not part of the order itself but can be enforced separately.

Appeal Rights under TMA 70

The Taxes Management Act 1970 outlines the procedures and rights related to tax appeals. It specifies that partners have the right to appeal against tax assessments and amendments made based on partnership returns, ensuring that individual partners can challenge decisions affecting their personal tax liabilities.

Conclusion

The Tribunal’s decision in Phillips v. HMRC underscores the importance of accurately determining the existence of a partnership based on the sharing of net profits. Furthermore, it affirms that all partners, regardless of their status as nominated partners, possess the inherent right to challenge tax assessments and amendments. This ensures that individual partners are not unfairly bound by partnership tax decisions made solely by the nominated partner.

This judgment serves as a crucial precedent, safeguarding the rights of non-nominated partners and promoting fairness within the framework of partnership taxation. It emphasizes the necessity for HMRC to engage with all partners when disputes arise and reinforces the judiciary’s role in interpreting statutory rights to protect individual taxpayers within partnerships.