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HMRC internal manual

Partnership Manual

Indirect, capital and transfer taxes and other tax obligations: VAT and partnerships: VAT avoidance using partnerships

Much VAT avoidance is centred on minimising the amount of irrecoverable VAT arising to businesses that are wholly or partially exempt. HMRC is aware of schemes that use partnerships to achieve this, usually through collusion with the supplier. One example involves a partnership being set up so that services that would have been provided as a taxable supply are instead provided as a partnership contribution, which would not generally be regarded as a taxable supply. In another example, a limited partnership is set up between the business and its supplier, with the general partner being a subsidiary company of the supplier within its VAT group; no output tax arises on the supply to the limited partnership via the general partner as intra-group transactions are disregarded.

Where you suspect that a partnership is part of a scheme of avoidance, you should contact your local TAPE (Tax Avoidance and Partial Exemption) team or AAG (Anti-Avoidance Group).

Pointers to a VAT partial exemption avoidance scheme could be-

  • Pre-transaction ruling requests, concerning the liability of supplies made as contributions to the LLP by the service company.
  • LLPs established between businesses with little immediately apparent synergy.
  • Joint ventures business shown on the accounts of the service company.
  • Changes within the Cost Ledger of the exempt business, receiving services without showing a VAT element.