CheckLists.Tax (beta)
H1. Partnership/LLP income
GENERAL
Existence of partnership
- Business
- Broader than trade (GCH, §135).
- Given its ordinary commercial meaning and includes investment business if carried on as a commercial activity (GCH, §134).
- Same approach as for incorporation relief (GCH, §134(4); Ramsay 2013).
- Some limited activity in relation to investments can be sufficient:
- "[167]...However, we note that, in this case, the LLP's business was not simply passive. The LLP did not make a profit simply by holding shares and receiving dividend income. It made its profit by buying and selling shares. In addition, the LLP – through Mr Hutchings – did some, albeit limited, research to identify and monitor investments. In our view, it was open to the FTT to reach the conclusion that it did that that level of activity combined with the other elements that the FTT identified, was sufficient degree of activity to amount to a business in this context." (GCH)
Legislation: Partnership Act 1890, s.1; s.2; s.45;
Cases:
Commissioners of Inland Revenue v Korean Syndicate Limited [1921] 3 KB 258;
Inland Revenue Commissioners v Westleigh Estates Company Limited [1924] 1 KB 390;
Commissioners of Inland Revenue v The Tyre Investment Trust, Ltd (1924) 12 TC 646;
American Leaf Blending Co Sdn Bhd v Director-General of Inland Revenue [1979] AC 676;
Customs and Excise Commissioners v Lord Fisher [1981] STC 238;
Jowett v O'Neill and Brennan Construction [1988] STC 482;
HMRC v Salaried Person Postal Loans [2006] EHWC 763 (Ch);
Elisabeth Moyne Ramsay v HMRC [2013] UKUT 226 (TCC);
HMRC v. GCH Corporation Limited [2026] UKUT 219 (TCC), Edwin Johnson J and Judge Greenbank;
HMRC manuals:
Commentary:
See also:
- Persons carrying on a business in common with a view to profit
General
- "Partnership is the relation which subsists between persons carrying on a business in common with a view of profit." (PA s.1).
- "“business” includes every trade, occupation, or profession." (PA, s.45).
- Joint ownership of property does not of itself create a partnership (PA, s.2).
Informality not a bar
- "The policy of the law has been to recognise that a legally binding partnership may be created wholly informally by parties commencing business together with a view to sharing profits, the law fleshing out their relationship by means of the implication of detailed terms through the Partnership Act 1890..." (Medcalf, §65).
Terms
- Very slight evidence needed to exclude the default terms in Partnership Act (default terms, not a presumption) (Khan v. Miah).
Legislation: Partnership Act 1890, s.1; s.2; s.45;
Cases:
Medcalf v. Mardell [2000] EWCA Civ 63;
HMRC manuals:
Commentary:
See also:
- With a view to profit
- There must be a genuine purpose to earn a profit but it need not be the main purpose (Ingenious, §119; GCH, §175).
- Profit is objective, but the purpose is subjective (Ingenious §123; GCH, §175).
- No requirement as to the quantum of the profit (GCH, §175).
Legislation:
Cases:
Ingenious Games LLP v. HMRC [2021] EWCA Civ 1180, Henderson, Phillips, Richards LJJ;
HMRC v. GCH Corporation Limited [2026] UKUT 219 (TCC), Edwin Johnson J and Judge Greenbank;
HMRC manuals:
Commentary:
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- Commencement of partnership
General: embarking on the agreed activity
- "The rule is that persons who agree to carry on a business activity as a joint venture do not become partners until they actually embark on the activity in question. It is necessary to identify the venture in order to decide whether the parties have actually embarked upon it, but it is not necessary to attach any particular name to it ... The question is whether they had actually embarked upon the venture on which they had agreed. " (Khan v. Miah)
- "It is clear therefore, that such a relationship commences when the partners embark upon the activity in which they have agreed to be engaged." (Coward, §177)
- Question is not whether they have commenced trading (Khan v. Miah).
Set up activities
- Working to set up the business activity can mean that the parties have embarked on the agreed venture.
- "...Dr Coward and Mr Robertson were all working to set up the business, she was progressing the regulatory status of the business, Mr Robertson was writing the back office software and Dr Coward was beginning the trading software. In such circumstances, in my judgment, there can be little doubt but that they had embarked upon the venture upon which they had agreed and accordingly that there was a partnership between them during the period from September to December 1992." (Coward, §180).
- In Khan v. Miah, the parties acquired suitable premises for a restaurant business, obtained planning permission, commissioned a design, contracted with builders for conversion, contracted to buy equipment and opened + used a partnership bank account.
- HoL held that it was clear that trading had not commenced, but the set-up was part of the business venture:
- "They did not intend to become partners in an existing business. They did not agree merely to take over and run a restaurant. They agreed to find suitable premises, fit them out as a restaurant and run the restaurant once they had set it up. The acquisition, conversion and fitting out of the premises and the purchase of furniture and equipment were all part of the joint venture, were undertaken with a view of ultimate profit, and formed part of the business which the parties agreed to carry on in partnership together...Once the judge found that the assets had been acquired, the liabilities incurred and the expenditure laid out in the course of the joint venture and with the authority of all parties, the conclusion inevitably followed."
Timing of formal agreement
- Formal agreement may be entered into after commencement.
- "[187]...It seems to me that the paragraph is directed to a different circumstance where there is an actual executory agreement rather than a situation such as this where the partners had already embarked on the activities of the partnership and an agreement was entered into at a later date." (Coward, §187)
Acquisition of an asset intended to be used for activity
- Buying a property may be the first step of the joint venture:
- "But it is clear from the rationale of Lord Millett's speech that it would have been enough for the parties simply to have bought the premises to develop into a restaurant, as a joint venture partnership." (Christie Owen, §46).
- Even if it is not immediately to be used for the intended business purpose:
- "In the present case the three friends formed a partnership to buy The York. It was at present a convalescent home. In the short run, pending development, it might have been run as a form of bed and breakfast or hotel, or student lodging. In the long run, the plan was to redevelop the site as a whole, and to fit out the seafront premises as a restaurant. Such plans might all lie for their execution in the future, but the first step of the joint venture was to acquire the property." (Christie Owen, §46).
Legislation:
Cases:
Christie Owen & Davies Plc v. Raobgle Trust Corporation [2011] EWCA Civ 1151;
Coward v. Phaestos Ltd [2013] EWHC 1292 (Ch), Asplin J;
HMRC manuals:
Commentary:
See also:
LLPs existence and transparency
- Treatment of LLP as transparent
General approach
- LLP treatment as transparent limited to the circumstances in which a general partnership would be regarded as in business for the purposes of Partnership Act 1890 (GCH, §129).
Business
- Broad approach: "has to extend to all forms of activity that persons can undertake in partnership" (GCH, §134).
- Any gainful use to which an LLP puts any of its assets prima facie amounts to the carrying on of a business, at least where there is some activity (even if intermittent) (GCH §§134, 165).
Legislation: TCGA s.59A;
Cases:
HMRC v. GCH Corporation Limited [2026] UKUT 219 (TCC), Edwin Johnson J and Judge Greenbank;
HMRC manuals:
Commentary:
See also:
INCOME TAX
Allocation and charging of profits
- Profits allocated under ITTOIA s.850 but charged under s.8
Basic approach
- ITTOIA s.850 calculates what an individual's share of the profits of a partnership is, but does not impose a tax charge on that profit share.
- The person chargeable on a profit share allocated to a partner is determined under s.8: the person who receives or is entitled to that profit share (Burley §65).
Determining profit share
- A partner's share of the profit or loss of trade carried on by partnership/LLP is determined in accordance with firm's profit-sharing arrangement during that period.
- "it must be possible to tell from the profit-sharing arrangements in place in the firm in that period whether any part of the profit or loss of the firm's trading in that period is definitively attributable to the individual and if so in what amount" (HFFX, §71(1)).
- Arrangements have to include contractual right to receive/suffer that part of the profit or loss:
- "the arrangements have to include a contractual right for the partner to receive (or suffer) the part of the firm's profit (or loss) which is to be treated as his or her income under this provision in that period" (HFFX, §71(1)).
- If profit is allocated to a company in the period and contributed back to the LLP as capital to be reallocated to other partners, that does not mean that the company did not receive the profit share, at least where the steps have a commercial purpose (HFFX, §74).
- Look at how the economic value that goes to make up the profit was used (Burley §70).
- Cannot be divorced from commercial reality and substance (Burley §67).
Default terms re profit share
- Very slight evidence needed to exclude the default terms in Partnership Act (default terms, not a presumption) (Khan v. Miah).
Allocations subsequent to the period
- The profit allocation is based on rights of the partners which exist during the relevant period of account (HFFX, §72).
- An agreement made after the end of the period is not relevant for income tax purposes (HFFX, §72).
- Query the position where the partners agree to defer allocation.
- HFFX indicates that 100% of the profit must be allocated in the period (§81).
- Perhaps the presumption of equality applies (HFFX, §72).
Legislation: ITTOIA s.8; s.850;
Cases:
Burley v. HMRC [2025] UKFTT 989 (TC), Judge Baldwin;
HMRC v. HFFX LLP [2026] UKSC 17;
HMRC manuals:
Commentary:
See also:
- Individual still entitled to income represented by profit share following assignment if the income benefits him/her
- In Burley, the taxpayer assigned his right to the profit share of a partnership to an LLP, but the assignment was subject to a pre-existing arrangement that used the partnership profits to discharge a loan owed by the taxpayer. Held: taxpayer still entitled to profit (§§82 - 88).
- "[91] This is not a case where the income Mr Burley was receiving was being received by him in some fiduciary or representative capacity. Mr. Burley was entitled to the income for the purposes of section 8 because the income was being applied for his benefit, and his benefit only; it is his income on which he is fully chargeable to income tax."
Legislation:
Cases:
Burley v. HMRC [2025] UKFTT 989 (TC), Judge Baldwin;
HMRC manuals:
Commentary:
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LLP/partnership income arising to company
Mixed partnership reallocation to individual partner
- Profits can be reallocated even if they might be said to relate to a period when the individual was not a partner (Walewski, §31);
Legislation: ITTOIA s.850C to 850E.
Cases: Walewski v. HMRC [2021] UKUT 133 (TCC);
HMRC manuals:
Commentary:
See also:
Transfer of income streams through partnerships
XX
XX
Legislation:
Cases:
HMRC manuals:
Commentary:
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NATIONAL INSURANCE CONTRIBUTIONS
Class 1
- Partners receiving directors fees
- Certain directors fees received by members of professional partnership are excluded from Class 1 (SSCR r.27; NIM12004).
Legislation: SSCR, r.8, r.27;
Cases:
HMRC manuals:
NIM12001 - Class 1: Calculating Class 1 NICs for Directors: Introduction;
NIM12004 - Class 1: Fees received by professional partnerships and other companies: Introduction;
Commentary:
See also: