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HMRC internal manual

Business Income Manual

Partnerships - general notes: existence of partnership

S2(3) Partnership Act 1890

In determining whether a partnership exists in any particular case, the starting point is the statutory definition:

’Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.’

It is important that you establish all of the facts to determine the true relationship between the parties. This will include finding out what the intentions of the parties were. No single factor is likely to be conclusive on its own. You will need to form an overall view.

A declaration that a deed is to create a partnership relation, or is not to do so, is not conclusive on its own, though it may cast some light on the parties’ intentions - see Morden Rigg & Co and R B Eskrigge & Co v Monks [1923] 8TC450. In that case, two companies purchased and sold cotton and shared profits. The agreement disclaimed that their relationship was one of partnership but it was nevertheless held to be one. In Fenston v Johnstone [1940] 23TC29 an agreement for joint purchase and development of land stated that it did not constitute a partnership but it was nevertheless held to be one.

A mere assertion that a partnership exists is not conclusive if there is no supporting evidence. In CIR v Williamson [1928] 14TC335 a father and sons worked a farm. There was no partnership deed, no evidence that profits were shared and the father conducted all financial arrangements. The court decided that there was not a partnership.

The fact that the parties did not intend to create the relationship of partnership is a factor to be taken into account in deciding whether a partnership exists but again is not conclusive - see Horner v Hasted [1995] 67TC439. A senior manager in an accountancy practice was given the status of partner within the firm and argued that he was a partner. The manager was paid as an employee though the salary was a share of profits. The intention of the firm was that he should not be a partner as this would be contrary to professional and statutory rules. The court decided that he was not a partner).

The receipt of a share of net profits is prima facie but not conclusive evidence of partnership. An agreement to share net losses in the sense of being obliged to make good those losses is an even stronger indication.

A loan advanced to a business on terms that the rate of interest is to vary according to the profits does not of itself make the lender a partner in the business, provided that the loan agreement is in writing and signed by the parties concerned. A contract for remuneration varying according to the profits does not of itself make the servant or agent a partner in the business. As regards salaried partners you should refer to BIM82025.

A partnership whose income is above the VAT registration limits is required to register on Form VAT 2 with HMRC. If a partnership fails to register that of itself does not mean that there is no partnership but it is a factor to be taken into account in deciding whether a partnership exists.

For a review of other factors which might be evidence of partnership, and earlier cases, see Saywell and others (trading as Eaton Tractor Co) v Pope [1979] 53TC40 (in which a partnership deed was held not to have retrospective effect) and Alexander Bulloch & Co v CIR [1976] 51TC563 (where it was held that persons claimed to be partners who were minors were not partners - see BIM82065).

Who is a Partner?

The test to be applied is that at S1(1) Partnership Act 1890:

’Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.’

In the case of Tiffin v Lester Aldridge LLP [2012] EWCA Civ 35 the Court of Appeal said that in looking at whether someone was a partner, it was important to look at the intention of the parties.

Although some factors are seen as being indications that someone is, or is not a partner, their importance will vary depending on the facts of the case. In the case of Williamson & Soden v JJ Briars [2011] UKEAT/0611/10/DM, Briars received a share of the profits: although this is often an indication of being a partner, in this case it was outweighed by other facts and he was held to be an employee.

In applying the test of whether someone is carrying on a business in common:

  • You have to look at all the facts of that case.
  • No single factor will be determinative.
  • The weighting of any factors depend on the facts of that case.
  • The intention of the parties is important.
  • Is the person really a principal; that is, someone who is part of the business or someone who is its servant?

Where a person admitted as partner is a nominee, acting under the instructions of a principal, it is necessary to decide who is taxable on the profit share. The person taxable on the profit share is the person who was admitted as a partner, whatever the context in which they have become a partner. If the other partners admitted the principal to the partnership but agreed to allow the principal to stand behind a nominee, the principal is taxable on the profit share. In other cases he nominee is taxable, as the nominee is the person admitted to the partnership.