In Mr Douglas Shanks v HMRC [2019] TC07118 the FTT cancelled penalties for inaccuracies but disallowed partnership losses; they were not substantiated and from a different trade to the profits against which they were being offset.
In the case of an LLP, the LLP carries on a trade and:
- Each partner is then deemed to carry on a notional trade of their own in respect of their share of the firm's trading profits or losses
- A partner permanently ceases to carry on a notional trade at the earlier of:
- when they cease to be a partner in the firm, and
- when the firm permanently ceases to carry on the actual trade.
Trading losses carried forward can only be offset against the profits of the same trade.
Mr Shanks was an accountant operating first through his own LLP, Douglas Shanks LLP (“DS LLP”) and then with two other accountancy LLP’s. He had been suffering ill-health over a number of years.
- DS LLP ceased trading in 2008 and was dissolved in 2009.
- Mr Shanks filed an amended partnership return in 2012 for DS LLP for 2008/09, claiming current year losses of £221,667 and carried forward losses of £253,298. He filed his 2008/09, 2009/10 and 2010/11 personal returns at the same time.
- He made white space disclosures saying “My income is treated as one profession throughout the time in the returns and should be treated as a continuation of the same profession.”
- He had self-employment profits from the other firms for 2008/09, 2009/10 and 2010/11 and claimed to offset the DS LLP losses against those profits.
- HMRC enquired into his returns for the three years ended 2010/11:
- Closure notices were issued, disallowing all of the trading losses for 2008/09 and with penalties for inaccuracy, reduced by internal review, of £55,104.84.
- HMRC refused to accept the losses because they were out of time and filed after DS LLP had been dissolved.
- Accounts for DS LLP to support the loss claims were only provided to HMRC after the enquiry was closed though the formal HMRC internal review was still ongoing. The review officer did not take the figures into account when considering the case.
The FTT dismissed the appeals against all of the closure notices.
- The review officer’s failure to refer to the draft accounts for DS LLP did not demonstrate any overcharge:
- The accounts were draft with no explanation or justification why they were draft.
- There was scant information in them; they simply showed turnover, “administrative expenses”, and interest payable/receivable, with no attempt at an analysis to justify the loss claim.
- Losses incurred in DS LLP were not available to carry forward against profits arising from the other firms as they were not profits of the same trade. Each partnership was a separate notional trade.
The judge allowed the appeal against the penalties in full; there was no deliberate inaccuracy or failure to take reasonable care; when Mr Shanks submitted his returns he took a view on how his income should be reported which he subjectively believed was accurate; that view was not spurious or fanciful; and he explained to HMRC (via the white space) exactly what he had done and why.
The judge did go on to say that no reduction for special circumstances would have been due as Mr Shanks, although operating under personal difficulties, was able to carry on a demanding profession and so was in the same (if not better) position as most taxpayers to file accurate self-assessment tax returns.
Links to our guides:
Penalties: Errors in Returns and Documents (subscriber version)
How to appeal a tax penalty (subscriber version)
Losses, trade losses and sideways relief
Partnerships (unlimited or limited?)
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