Family partnership not trading

In The Magnet Partnership v HMRC [2022] TC8570, the First Tier Tribunal (FTT) held that payments made from a trading partnership to ‘family partnerships’ to utilise the tax-free personal allowances of family members were not allowable deductions. The expenses were not incurred and even if they had been, they were not incurred wholly and exclusively for the trade.

• The Magnet Partnership (Magnet) traded as "Magnet and Rope Access designers", it held intellectual property which it licensed to a related party.
• Magnet's partners were four ‘family partnerships’, created to act as its partners, each derived its sole income from Magnet.
• The profit share of each family partnership was decided in an annual meeting of Magnet and utilised family members' tax-free personal allowances.
• HMRC raised enquiries and issued Discovery Assessments on Magnet, denying that expenses deducted had actually been incurred, or as an alternative incurred Wholly and Exclusively for the purposes of Magnet's trade.
• Following an unsuccessful Statutory Review,  Manet made an Appeal against HMRC's decision to the FTT.

The FTT found that:

• There was no evidence that the payments claimed as deductions were paid at all:
  • The family partnerships had no bank accounts.
  • The evidence that was provided was inaccurate and contradictory.
• Even if the payments were paid, they would not be an allowable deduction as they were not incurred wholly and exclusively for the purposes of the trade.
  • The taxpayer had provided no evidence that work had been performed by the family partnerships or its partners. They were not trading themselves.
• The discovery assessments raised were valid as:
  • There had been a loss of tax as the amounts paid to the family partnerships were drawings which are not deductible.
  • The discovery was not stale on the basis of the Supreme Court decision in Tooth.

The appeal was dismissed.

Useful guides on this topic

Partnerships: What's New 2021-22
Update, review of recent cases, and legislation

Discovery Assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? What are your rights of appeal and defences?

Discovery Assessments: At a glance
What is a Discovery Assessment? When can HMRC make a Discovery? What are the time limits for Discovery Assessment? 

Wholly and Exclusively toolkit
What does 'wholly and exclusively' mean? How do you determine if a cost is wholly and exclusively incurred for the purpose of a trade? What cases are there? 

Statutory Review
What is a Statutory Review? Is it automatic? What happens in a Statutory Review? Can you challenge a Statutory Review's findings? Can you influence a Statutory Review?

How to appeal an HMRC decision
Disagree with an HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External links

The Magnet Partnership v HMRC [2022] TC8570