Husband and Wife Partners-No Partnership Agreement

Can husband/wife partnership agree the share of profits in hindsight? No P'ship Agreement Exists

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This question has been posed due to a comment in another post questioning the ability to alter the profit sharing split retrospectively after the year end at the point the accounts are in draft for a husband and wife partnership.

My previous employer, a firm of Chartered Accountants, had around 2,000 partnerships consisiting mainly of husband and wife corner shops in Birmingham. There were never any partnership agreements in place. After the end of the year profits were split in a manner which resulted in the lowest joint tax bill.

What was the profit sharing ratio in these cases? It was informally such split as the accountant would determine, after the year end, bearing in mind the spare personal tax allowances available to each of the spouses.

There was never any piece of paper to prove what the partnership agreement was. The clients would merely assume the profits would be split by the accountant in the manner which would result in the lowest tax bill. (In fact, I would guess many of these clients would probably have no concept of what a profit-sharing agreement was, their sole concern being their beloved accountant producing teeny-weeny tax bills as if by some miraculous sleight of hand).

Also note HMRC guidance which has some bearing on this at https://www.gov.uk/hmrc-internal-manuals/partnership-manual/pm132400

It would be interesting to learn what others do with their husband and wife partnerships.

And how on earth could HMRC dispute the apportionment each year if there is no piece of paper (Partnership Deed) to say otherwise? Partnership "Pillow Talk" agreement, perhaps?

 

 

Replies (14)

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By David Ex
15th Sep 2021 12:47

penelope pitstop wrote:

And how on earth could HMRC dispute the apportionment each year if there is no piece of paper (Partnership Deed) to say otherwise? Partnership "Pillow Talk" agreement, perhaps? 

HMRC view:

https://www.gov.uk/hmrc-internal-manuals/partnership-manual/pm137000

“ … allocation of profits or losses for an accounting period cannot be varied retrospectively after the end of that period.”

Partnership Act seems to provide for equal shares. Guess that mean that a partnership agreement is required for some other split?

https://www.legislation.gov.uk/ukpga/Vict/53-54/39/section/24

Never dealt with this in practice so may be way off.

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Replying to David Ex:
paddle steamer
By DJKL
15th Sep 2021 12:54

Of course nothing to say a partnership agreement could not be verbal, albeit tricky to argue in a dispute.

I tended to prefer fixed partnership salaries and then a split of residual profits in some prearranged ratio rather than just percentage profit shares.

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Replying to DJKL:
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By David Ex
15th Sep 2021 13:21

DJKL wrote:

Of course nothing to say a partnership agreement could not be verbal, albeit tricky to argue in a dispute.

Whatever the technical rights and wrongs are, has anyone ever had a serious and successful challenge from HMRC on the point- for a smallish client?

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Replying to David Ex:
paddle steamer
By DJKL
15th Sep 2021 13:47

I have not.

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Replying to DJKL:
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By David Ex
15th Sep 2021 13:51

DJKL wrote:

I have not.

And I think that probably tells you every you need to know!!

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Replying to David Ex:
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By Calculatorboy
16th Sep 2021 00:30

No....Partnership act simply says equal psr in absence of oral or written agreement to the contrary , there is the difference ..

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By Hugo Fair
15th Sep 2021 13:20

There's 'custom and practice' ... and then there's having a defence against HMRC - if you don't have any documentary evidence to support an alternative position.

In most cases of "husband and wife corner shops", the non-partnership income of either party is unlikely to vary much from year to year ... so it's easy enough to agree a %age split before the end of the period AND put it in writing. By default this would be the same as the previous year, but if either partner announces a material change in other income (at say a review meeting held at the end of month 11) then the split can be revised/documented for the forthcoming year-end.

No need for a formal Partnership Deed (in these straightforward cases), just evidence that the decision wasn't made 'out of time' (from HMRC's perspective).
Plus you've now got a good reason for the partners keeping you up-to-date with their circumstances - and a brief catch-up in month 11 never did anyone any harm.

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By CJaneH
15th Sep 2021 15:23

After over 50 years from commencement of my articles, and being involved always in small practices I have never seen a partnership agreement. Split of profit decided after preparation of draft accounts, after making due consideration of tax, work performed and drawings made. Therefore any variation from 50:50 always retrospective.
Never seen the split challenged by HMRC either.

I was always more concerned that often the wife did very little and that giving the wife 50% of profit for answering the phone seems illogical but apparently legal.

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Replying to CJaneH:
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By DJKL
15th Sep 2021 16:57

Sheltered life, I have a few different ones in my office just re our entities and am by chance currently awaiting a call from solicitors before 5.30 (when I finish for the week) with indicative pricing re a rewrite. Not only do we have partnership agreements we also have them recorded in the books of Council and Session. I am also currently in the midst of shareholder agreement drafting (lawyers do the work we just make observations/comments/assess risks)

Maybe it is because we tend to have entities invested in assets, but fallings outs do happen and at least having a partnership agreement offers a structured route out of the war zone.

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Replying to CJaneH:
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By Justin Bryant
15th Sep 2021 17:09

It's not all that illogical as she has unlimited (joint & several) liability for the GP's debts.

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Replying to CJaneH:
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By Eddystone
09th Oct 2021 12:32

Exactly ! Always split to best tax advantage, never raised an eyebrow at HMRC.

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By More unearned luck
15th Sep 2021 19:18

The idea that partners can't agree retrospectively on how to share profits seems distinctly odd. Firstly it isn't HMRC's business to police how partnerships are conducted. Secondly key employees and directors may receive discretionary bonuses after the results are know, why should it be different for partners?

HMRC's reliance on Bucks and Bowers seems shaky:
The judge's remarks were obiter: they ain't binding on any court or tribunal.
It was a partnership that included limited companies and nowadays there is anti-avoidance legislation to stop artificial allocations when there are company partners.
The reallocation was made nearly 3 years after the end of the y of a (the delay seems to have upset the judge).
The reallocation was done in an attempt to maximise a relief that no longer exists. The judge said that the right to that relief crystallised at the end of the y of a. That is to say, the judge didn't say you couldn't reallocate - only that any such reallocation was ineffective for that (now defunct) relief.

The consequences of any successful attempt by HMRC to stop reallocation in a partnership of only natural persons is that some partners will be taxed on income that they haven't had and some partners are not taxed on some of their income. HMRC will need a better argument than Bucks to make that stick.

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Replying to More unearned luck:
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By More unearned luck
15th Sep 2021 20:01

Also s12SBZB TMA says that the allocation in the partnership return is conclusive, subject only a right to object by one or more of the partners. This seems to remove any alleged power of HMRC to allocate profits differently from what's in the return, at least in cases where there are no non-natural partners.

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By Calculatorboy
16th Sep 2021 00:26

A partnership can be an oral agreement ..

client signs accounts declaration confirming psr in oral agreement, what is the issue ?

Move on ,

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