Share this content
8

Can I form a partnership when..........

Can I form a partnership when on of the partners will be doing nothing at all to contribute?

Didn't find your answer?

Client is applying pressure for me to switch him from sole trader status into partnership with his wife (because his mates have done it!). Client is a consultant surgeon with private practice (sole trader). Wife is not medically trained at all and will do nothing whatsoever in any partnership that would be formed. This is clearly an attractive option because the wife has no income so a large portion of the current sole trader profits (about 43K) would be sheltered from the higher rate tax and some basic rate tax currently being charged on these profits to my client. Profits for this purpose are £175K.  

I do not believe that the formation of such a partnership would be correct given the wifes status but I am struggling to defend it right now  particular against the pub talk but I have come across this before where poor advice is seen as brilliant advice by clients where it saves them tax albeit they are an HMRC question away from trouble!          

Any advice would be appreciate on this thank you

Replies (8)

Please login or register to join the discussion.

By Ruddles
18th Feb 2017 13:31

I assume that the term 'sleeping partner' is new to you?

Thanks (0)
RLI
By lionofludesch
18th Feb 2017 13:46

The sleeping partner is the person who dreamt up this idea, I suppose.

It's always open to HMRC to challenge this as a sham.

Make sure the taxpayers know the risks and get a water-tight partnership agreement in place.

Thanks (0)
Replying to lionofludesch:
By Ruddles
18th Feb 2017 13:59

I doubt that they would challenge it as a sham as such - HMRC widely acknowledge the concept of sleeping partners. They may, though seek to invoke settlements legislation (which I suppose practically amounts to much the same thing).

Thanks (0)
avatar
By cbp99
19th Feb 2017 12:26

BIM 82065 worth a read, and has been said, settlements legislation will be relevant. Also need to check the rules of the professional body.
Presumably there is admin work which could be done by the wife, possibly under Paye if other options don't work.

Thanks (0)
By Marion Hayes
20th Feb 2017 09:59

The important aspect of this choice is that the wife understands the full implications of joining a real partnership, and that you document your explanations and put in place a comprehensive partnership deed.
You need to explain that at present she would have at least some protection from creditors etc should any action be taken against her husband but joining a partnership brings all her 'assets' into the joint and several liability risk arena.
Everyone will need to be notified of the partnership and insurances amended accordingly.
Will she be introducing capital on joining, or is she only entitled to a share of profits going forwards.
What are the implications of the partnership on the superannuation fees paid by the partnership in respect of NHS transactions i.e. will only part of the income be qualifying from his point of view, with the balance of contributions deducted being a lost expense as she may not qualify to join the scheme. (I have no idea on this but it seems potentially problematical)

Thanks (0)
Replying to Marion Hayes:
avatar
By Discountants
20th Feb 2017 14:37

Marion Hayes wrote:

What are the implications of the partnership on the superannuation fees paid by the partnership in respect of NHS transactions i.e. will only part of the income be qualifying from his point of view, with the balance of contributions deducted being a lost expense as she may not qualify to join the scheme.

I would say this is the most important point arguing against a partnership in this case.
It's probable the Client's friends have overlooked this whilst only focusing on the tax savings.

Thanks (0)
avatar
By Justin Bryant
20th Feb 2017 12:06

How on earth can a sleeping partner be a sham arrangement (all else being equal)? As has often been said, tax avoidance is the spur to entering into valid arrangements/agreements. See para 67 here:
https://www.supremecourt.uk/cases/docs/uksc-2014-0151-judgment.pdf

There is zero chance of an HMRC sham challenge therefore (assuming no licence etc. needed by sleeping partner).

Thanks (0)
Replying to Justin Bryant:
By Ruddles
20th Feb 2017 15:16

Did you bother to read the entire thread. Most are agreed that this would not be challenged as a sham. The real potential problem is the settlements legislation.

Thanks (0)
Share this content

Related posts