Linslade case extends 'wholly and exclusively'

Two brothers in a business partnership won a legal victory against HMRC in dispute over the right to deduct legal costs from the profits of their business partnership.

The taxpayers' victory in Linslade Post Office and General Store v HMRC [2012] UKFTT 457 (TC) means that the definition of business expenses incurred “wholly and exclusively” for trade that can be deducted from profits is wider than previously thought, according to tax consultancy Gabelle.

The tribunal centred on an attempt by Shabir Visanji, who had a business partnership with his brother, to deduct around £36,000 in legal expenses when calculating his business’s profits.

Priya Dutta, a senior tax consultant at Gabelle, which advises accountancy firms on tax, said that the tribunal decision has underscored the need for accountants to give careful consideration to whether legal expenses are tax deductible. “Where legal expenses are incurred with a view to preserve an asset, they are deductible for income tax purposes.”

For Anne Fairpo's analysis of the Linslade case, listen to her AccountingWEB tax podcast 7 (6 Aug). Find out how you can pick up free, weekly CPD with this service, sponsored by CCH.

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Comments

Is this really new?

AndyC555 | | Permalink

I've not read the judgement but it seems to be in line with such previously decided cases as

Southern v Borax Consolidated Ltd and Morgan v Tate & Lyle Ltd.

Is this really new?

AndyC555

 

  

agree not new

The Black Knight | | Permalink

agree not new!

Added to which this is only a FTT decision, so has not really extended anything?

 

John Stokdyk's picture

Not new - but worthy of note

John Stokdyk | | Permalink

Thanks for the comments - we'll try to be a little more on the ball with our tribunal coverage, but we lack the resources to devote non-stop coverage to the latest decisions.

I had not been aware of quite so many cases around "wholly and exclusively" interpretations, but enough commentators raised the Linslade decision that we thought it was worth following up.

As noted above, these all appear to be first tier tribunal decisions that create a general mood rather than setting legal precedents. Is anyone aware of W&E cases that are going to upper tribunals?

Legal Fees

wingco44 | | Permalink

Hi John

I found this case interesting and it bears repetition, and particularly for me as I have similar legal fees to recoup.  Wholly and Exclusively incurred.

Keith

Divorce

kim walsh | | Permalink

I admit ignorance on this matter but it stikes me that a natural extension to this would be legal fees incurred in the preservation of assets and income owned solely against a spouse?

I have a client who has paid significant fees (excess of £100k) defending claims from a spouse against a property letting business and also a soletrader business. All claims dismissed by the court and costs awarded against the claimant, eventually.

The litigation is not a necessary consequence of divorce, but the proceedings were wholly and exclusively for the purpose of protecting income and assets of the individual. 

Any thoughts?

Tom 7000's picture

new    2 thanks

Tom 7000 | | Permalink

sometimes its nice to be reminded of the old stuff...its easy to forget ;o) or not know!

 

good reporting

squay's picture

Carry On Reporting    2 thanks

squay | | Permalink

Not the film Carry On Regardless. I'd rather you report these cases than assume either we already know or they're not important enough. Carry On Reporting please.

I'm confused    2 thanks

mackthefork | | Permalink

The partnership is an entity separate from the partners themselves, how were the legal fees used to protect a business asset, surely the fees were used to protect the personal wealth of the two partners (which would not satisfy wholly and exclusively, right?), as if the sister is taken as an equal partner, then the business itself retains the assets.  Sounds like its worth a read though.

Regards

MtF

cfield's picture

No legal personality

cfield | | Permalink

mackthefork wrote:

The partnership is an entity separate from the partners themselves.

It's not actually. Unless it's a Scottish partnership or an LLP, a partnership has no separate legal personality from the partners themselves. Partnership property is normally held as a tenancy in common. Therefore, the partners were defending their own assets, not those of a separate legal entity.

Comment removed by cmg

cmg | | Permalink

Comment removed by cmg pending further thought!

incompetent or sinister?

reilloc | | Permalink

Surely the most important thing here is that the HMRC must, on the basis of the previous cases noted above and the minor issue of Partnerships (in England) not being separate to the individuals, have known that the tribunal would not find in their favour. If they are convinced they're right then why haven't they appealed (and so, if they win on appeal, setting precedent?

So this is either simply wasting taxpayers money or more sinisterly, hoping to bully partnerships into accepting a tax liability they do not in law have?

Out of interest who pays the legal fees for going to tribunal?

Steve Kesby's picture

To clarify...

Steve Kesby | | Permalink

... on the point discussed by Chris and MtF, whilst a partnership doesn't have separate legal capacity, there is a distinction in law (for the purposes of the wholly and exclusively test) between the interests of the business and the interests of the person(s) that carry that business on.

In Linfield, the sister (who was not a partner, and was therefore a third party) made a claim that would have forced a sale of the premises from which the business was run.  The legal fees were thus incurred, first and foremost, to protect the assets of the business (and did not create any new asset of enduring benefit).

The principle of preserving the assets of the business being W&E isn't new, but combining the concept with then separating the interests of the business from those of the person(s) carrying it on and attaching it to the interests of the business, wasn't present in the other precedents (being companies) and was, I think, the area which HMRC disputed.

In reaching their decision, the FTT also referred Cooke v Quick Shoe Repair Service (a partnership), which was a case offered by HMRC.

INCOMPETENT AND SINISTER AND BULLYING TACTICS

david5541 | | Permalink

[quote=reilloc]

"Surely the most important thing here is that the HMRC must, on the basis of the previous cases noted above and the minor issue of Partnerships (in England) not being separate to the individuals, have known that the tribunal would not find in their favour. If they are convinced they're right then why haven't they appealed (and so, if they win on appeal, setting precedent?

So this is either simply wasting taxpayers money or more sinisterly, hoping to bully partnerships into accepting a tax liability they do not in law have?

Out of interest who pays the legal fees for going to tribunal?"

We are having to go to the FTT just because hmrc have taken a guilty until proven innocent argument over events that happenned 10 years ago.

9/10 times it is a) wasting taxpayers money b)sinisister and supposedly based on risk models which even inspectors dont understand c))using bullying tactics by quoting swathes of legislation before the tribunal date and sending out zillions of letters direct to the taxpayer in the middle of the enquiry process to scare the clients socks off. 

I am amazed that HMRC…

Trevor Scott | | Permalink

….are even having a go at the very people who legislate…

http://www.telegraph.co.uk/news/politics/9488879/Tax-inspectors-challenge-MPs-right-to-claim-expenses-on-accountants.html

It would seem unwise, as a strategy, to pick a fight with MP’s when it is they who legislate. Perhaps MP’s thoughts will turn to the very rule of “wholly, exclusively and necessarily” which has always struck me as too tough, unfair, disproportionate and therefore legally inconsistent.

 

Legal Fees - Personal Experience

wingco44 | | Permalink

This is a very complex area and depends on the level of Tribunal and the complexitiy of the case.  Normally, at a First Tier Tribunal each party pays its own costs.  But you could be adjudged as bringing the case unfairly and wasting the Court's time and have HMRC's costs added to your costs!  At an Upper Tier Tribunal it really depends on whether HMRC has acted unreasonably and that can be very hard to prove.  In my own case, I assessed that HMRC had acted properly in bringing the case and accepted my costs, although it hurt! 

If your case can be declared as 'Complex' you can avoid the risk of having to pay HMRC's costs but you would have to pay your own costs provided you ask for this within 28 days of the Court applying the 'Complex'  decision.

Possibly the best way to limit your costs is to find a Law firm that will take your case on a form of 'no win no increased/HMRC's fee' basis where they agree to take your case for a set fee which would also avoid incurring HMRC's costs.  Good Tax Specialist Law firms are essential for Complex cases.  You may even find a high-grade Law firm willing to work pro bono if they can see ground breaking element in your case.  You could also find a top law firm to defend your case and gain your costs but the up-front fees are staggering.  One top Law firm asked me for £50,000 on the table just to look at my case - I declined and fought the case on my own.

Have a look at the 'Rees Practice' for more information as to how HMRC views costs and take professional advice.

Hmm

mackthefork | | Permalink

cfield wrote:

mackthefork wrote:

The partnership is an entity separate from the partners themselves.

It's not actually. Unless it's a Scottish partnership or an LLP, a partnership has no separate legal personality from the partners themselves. Partnership property is normally held as a tenancy in common. Therefore, the partners were defending their own assets, not those of a separate legal entity.

Hi

I understand all that, partners J&SL for partnership debts, etc, however the trade is being carried on by the partnership, a return and accounts are completed to state same, profits are then divided up between the partners as agreed.  Why do you think Scottish ones are different, I know there is a separate legal entity created, but partners are still J&SL for partnership debts.  I'm not arguing I will read the details.

Regards

MtF

cfield's picture

Just a legal technicality

cfield | | Permalink

mackthefork wrote:

Why do you think Scottish ones are different

Check out BIM72035. Also, Partnership Act 1890 section 4(2). As you say, partners are still jointly and severally liable and it's not supposed to make any difference for tax purposes, so just one of those odd quirks in the legal system I guess.

 

John Stokdyk's picture

Another variation on the same theme

John Stokdyk | | Permalink

Again from our friends at Gabelle, who reported this week on the Purolite International v HMRC case, in which two brothers sought deductions for legal fees they incurred while fighting charges from the US Government for supplying goods to Cuba. HMRC disallowed the expenditure from the corporation tax computation on the basis that the expenditure was not wholly and exclusively for the purposes of Purolite’s trade. The brothers appealed to the First-tier Tribunal, stating that the reason that Purolite bore the legal costs of the litigation was because if they had lost the case, Purolite’s exports to the US could have been blacklisted and that would affect its trade.

The First-tier Tribunal rejected the brothers’ appeal. It was held that Purolite paid the legal expenses because the brothers wanted to protect themselves from the charges brought against them by the US Government.

Partnerships and Risk

reilloc | | Permalink

One thing that this whole thread highlights is that there are substantial risks to trading as a partnership (or indeed as a soletrader) that are unlikely to be known and understood by Joe Public when deciding whether or not to go ltd.

Partnership and risk

HUGH W DUNLOP | | Permalink

Unfortunately there are risks whichever trading method is used. The Companies Act is extensive and in most cases beyond the type of person who lacks extensive business knowledge. Attend almost any AGM and you will find the company secretary seated behind the chairman with his copy of the Act and various notes, ready to prompt the chairman when answering awkward, or sometimes relatively straightforward, questions

Thank you

mackthefork | | Permalink

Steve Kesby wrote:

... on the point discussed by Chris and MtF, whilst a partnership doesn't have separate legal capacity, there is a distinction in law (for the purposes of the wholly and exclusively test) between the interests of the business and the interests of the person(s) that carry that business on.

In Linfield, the sister (who was not a partner, and was therefore a third party) made a claim that would have forced a sale of the premises from which the business was run.  The legal fees were thus incurred, first and foremost, to protect the assets of the business (and did not create any new asset of enduring benefit).

The principle of preserving the assets of the business being W&E isn't new, but combining the concept with then separating the interests of the business from those of the person(s) carrying it on and attaching it to the interests of the business, wasn't present in the other precedents (being companies) and was, I think, the area which HMRC disputed.

In reaching their decision, the FTT also referred Cooke v Quick Shoe Repair Service (a partnership), which was a case offered by HMRC.

Now that makes sense, teach me to read the case before commenting.

Regards

MtF

slipknot08's picture

Scottish limited partnerships    1 thanks

slipknot08 | | Permalink

Scottish limited partnerships do have a separate legal personality, but nevertheless - as you say Mtf - HMRC regards all partnerships (including, by legislation, LLPs (unless in liquidation) - see s863 ITTOIA and s.59A TCGA) as transparent for tax purposes (and partners have joint & several liability etc, subject to limited liability of the limited partners). The general partner in a SLP has the same unlimited liability towards third parties as it would have under English law and the same duty of good faith. SLPs however can hold property in their own name, as distinct from English partnerships or LPs. Like English LPs they are dealt with under the Limited Partnership Act 1907, and also like English partnerships, they are not regarded as 'bodies corporate' for Companies Act 2006 purposes..

@slipknot08

mackthefork | | Permalink

thank you for the details, much appreciated.

Regards

MtF