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HMRC internal manual

Enquiry Manual

Partnerships: Recalculating Profits

If your enquiry has centred upon the business, you will need to check your findings against what you know of the partners’ personal finances. Individual means tests should be prepared for each partner.

Enquiries into larger and wealthier partnerships may involve capital statements possibly in conjunction with some sort of business economics appraisal. If you discover evasion then if all the partners have been involved fully you would expect to see results which suggested either a split of the evaded profits along the lines of the normal division of partnership profits, or an equal split of the evaded monies. It could be, for instance, that the arrangements for sharing the profits shown by the accounts have been agreed on the basis that each partner will be extracting an equal amount of cash every week.

Where there are discrepancies, suggesting that the evasion has not been shared on an apparently common-sense basis, or indeed, that some partners have not had a share at all, it may be that

  • you have failed to discover the full extent of the evasion through the capital statements of the partners who appear to have taken less or none, or
  • one or more of the partners is concealing the evasion from the others as well as HMRC.

Where one accountant is acting for all the partners in their personal capacities, you should discuss your findings with them, preferably at a meeting. Where the partners are separately represented, your position will be more difficult, although ultimately you may be faced with making some disclosure. If it does seem as if that will be necessary, the relevant parties should be forewarned.

It will obviously be to the partnership’s benefit if you can be persuaded that some members did have smaller shares in the evasion. You therefore need to look at the whole case carefully asking

  • what deficiencies might there be in the capital statements especially as regards cash spending?
  • how has the evasion happened? Was there equal opportunity for each partner?
  • whether any sort of business model can be constructed to arrive at an approximation of the true profits?
  • if there is anything significant in the way the partnership has grown? Long-standing partners might not be prepared to share either knowledge or fruits of evasion with more recent entrants. Alternatively, a younger man or woman might feel that a small partnership share is not sufficient reward for the energy and ideas invested in the business
  • whether the personal commitments of the partner or partners who have apparently been evading, tell you anything? In professional circles the damage to reputation of having swindled co-partners (rather than just HMRC!) could be very damaging to a partner. The individual may only have resorted to such behaviour because of severe financial difficulties.

Where the position remains unclear, there is more than one agent acting and you feel you may have to make some disclosure, you should seek advice from contact link.

If it is alleged that the savings of an individual partner were acquired from activities quite separate and distinct from the trade etc carried on by the partnership, you should take the line that the undisclosed profits are those of the partnership, unless there is satisfactory proof to the contrary.

You should normally apportion the agreed figure of understated partnership profits on the basis of the amount diverted by each individual partner. Where as a result of the investigation the amounts concerned are redistributed among the partners, so as to bring their total shares into line with the profit sharing arrangements for the years affected, you should normally use the redistributed basis to calculate the tax lost.