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HMRC internal manual

Debt Management and Banking Manual

HM Revenue & Customs
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Debt and return pursuit: VAT: liability for payment: partners

Persons registered for VAT in partnership may be individuals, partnerships or companies. Section 9 of the Partnership Act 1890, provides:

“Every partner in a firm is liable jointly with the other partners, and in Scotland severally also, for all debts and obligations of the firm incurred while he is a partner; and after his death his estate is also severally liable in a due court of administration for such debts and obligations, so far as they remain unsatisfied, but subject in England or Ireland to the prior payment of his separate debts.”

In relation to a partnership debt, the recovery action we choose and where the partnership is registered (England, Wales, Northern Ireland or Scotland) will determine the entity we pursue for the debt (see DMBM585150, and also for Scotland only, DMBM670230 and DMBM680230).

We may take recovery action against:

  • the partnership (as an unregistered company) or
  • any number of the solvent partners who are liable with the partnership for the debt (or part of it) or,
  • both the partnership (as an unregistered company) and any number of the solvent partners, in concurrent proceedings (at the same time), such as in insolvency proceedings.

Those we take action against cannot appeal our choice, and we are not required to explain our choice. Payment of the debt by one of the partners releases all the others. Questions of who contributes what may be settled afterwards between the partners themselves. In the unlikely event of an overpayment, as a result of one or more partners paying the debt, the overpayment may be repaid pro-rata to those who made payment.

If you are taking recovery action against more than one partner at the same time such as in concurrent insolvency proceedings, all action should be suspended where one party (e.g. a partner) challenges the debt (e.g. applies for the statutory demand to be set-aside or appeals to tribunal).

Partner leaves partnership

Where a partnership continues to trade but a partner ceases to be a member of the partnership, his liability for partnership VAT debts continues until the date on which we receive notification of the change in the membership (s.45 (2) of the VAT Act 1994) (not on the day he left).

But, if the partnership stops trading when the partner leaves, we calculate the partner’s liability to the date the partnership ceased to trade.

If necessary, we will calculate any partner’s liability on a daily basis. Section 45 (5) of the VAT Act 1994, provides:

“Subsections (1) and (3) above shall not affect the extent to which, under Section 9 of the Partnership Act 1890, a partner is liable for VAT owed by the firm; but where a person is a partner in a firm during part only of a prescribed accounting period, his liability for VAT on the supply by the firm during the accounting period or on the acquisition during that period by the firm of any goods from another member State shall be such proportion of the firm’s liability as may be just.”

Assessments and other documents served on the partnership since the partner left are deemed served on the partner (s.45 (3) and (4) of the VAT Act 1994).

Partner joining partnership

Partners joining a partnership with an existing debt, incurred prior to the date on which the partners joined, are generally not pursued for the existing partnership debt.

Where a partner joins a partnership part way through an accounting period in which a liability is incurred, the joining partner may become liable in full or part for the debt due for the accounting period.

Recovery against the correct partners

Care must be taken before commencing recovery action in identifying the correct partners liable for the debt. The most recent partner’s names or the partnership trading name on our systems may not give a full or true picture of the partners liable for the debt. Check Electronic Folder to identify the partners liable for the debt.

This is necessary where we are taking court proceedings (DMBM585150), in which the partners become severally liable for the debts due, and in Scotland where partners are jointly and severally liable.

Where there has been a change to the composition of the partnership (joining and leaving partners) you should determine the periods for which the liability is due and cross reference with the dates on which changes occurred to determine the liability of each of the partners for the debts due. Changes to the composition of the partnership should be documented on Electronic Folder by correspondence notifying the change to the partnership and the form VAT 2.

If you are taking recovery action against a partnership and are unsure how the liability should be apportioned to the past or present partners, discuss with your manager and if further advice is required send the details to the VAT or Enforcement Technical Teams, as appropriate.