Husband and Wife Businesses – is this a partnership or not?
The recent success that our Tax and VAT team experienced at the First Tier Tax Tribunal, in successfully appealing an HMRC decision requiring the clients to register for VAT as a partnership, has highlighted some important points for small businesses. The team managed to save our clients a belated notification penalty of £15,829 – much to their relief and an additional £150,000 (circa) for VAT assessments.
Peter Hastings comments “The case was based on HMRC’s belief that our clients had been carrying on one business in partnership, where as they contended they had each been carrying one separate business. We collated a considerable amount of evidence from our clients to rebut HMRC’s contention. The issue was whether Mr Belcher’s barbers shop was an independent business to Mrs Belcher’s ladies salon. They operated from the family home, but with the evidence given by our clients and the supporting documentation, the Tribunal accepted that our clients were both sole traders.
The HMRC staff guidance manual states – “Before you rule that a separated business is a single entity, you must confirm the trader’s intention when they organised the business”
We asked the investigators whether at any stage they had enquired about the intentions of Mr and Mrs Belcher regarding whether a single business was being run as a partnership or two business were being run by each of them respectively separately. Both officers replied that they had they had not asked Mr and Mrs Belcher about their intentions.
The fact that the various parties are related should not influence HMRC’s decision. Tribunal decisions have indicated that a wife can quite feasibly help her husband in his business (in her capacity as his wife) and still carry on her own business (in her capacity as a sole proprietor).
The manual also states: – “You should ask each individual to define the distinction between what they do in their business capacity and what they do to help out as a family member.’
The investigators were asked if they had followed this guidance in their questioning of Mr and Mrs Belcher. Both officers agreed that they had not done so.
Crucially, we applied the decision of the VAT and Duties Tribunal in the appeal of George Francis & Helen Francis [2006] V&DR 487; [2007] STI 388 and the recent decision of the Court of Justice of the European Union in Christine Nigl and others v Finanzamt Waldviertel (C-340/15).
We stressed that each business maintained a separate till, together with a separate ledger – HMRC had not taken these facts into account, nor that the profits of the two businesses were pooled and shared by them, as they were husband and wife living together, not simply joint owners of one business.
The relevance and significance of shared outgoings between our clients was also stressed. They may have had a single bank account together with a single trade account for purchases of consumables, but this must be considered in the context of their personal circumstances as husband and wife, and does not indicate a financial link in the operation of the businesses, as it might do if the owners of the business were not so intimately related.
Each business had its own staff, each business was responsible for its own staff, each business managed its own clients and that both Mr and Mrs Belcher made their own managerial and ownership decisions in relation his or her respective business.
The Tribunal accepted the points made and that Mr and Mrs Belcher carry on a separate economic activity and are a separate taxable person within the meaning of the Sixth VAT Directive and the Principal VAT Directive, and for the purposes of the Value Added Tax Act 1994.
Peter adds “Our clients were under a lot of stress but the collation of evidence, the way they presented their evidence and counsel (Marc Glover)’s attention to detail in his submissions supported by witness statements that were detailed and responded to each point resulted in the successful outcome. If you are in partnership, you really should have a Partnership Deed and ensure that you have had the correct VAT and Tax advice.”
If you would like to discuss aspects relating to this case or have a VAT dispute you wish to talk through you can contact Peter at ph@rogers-norton.co.uk or 01603 67639.