Partnership to sole trader PAYE scheme

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A partnership client has informed me that one of the 2 partners has left and the partnership ceased as at 31 March. The remaining partner is carrying on the business as a sole trader. Payroll has been run for the business after 31 March.

I've not encountered this situation before, but it looks like this can be treated as a succession and the payroll carried on under a new name and PAYE scheme reference.

Does anyone know the procedure for this - is it a case of registering a new PAYE scheme and informing HMRC that the employees are being transferred to it?

Any advice would be appreciated.

Replies (29)

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RLI
By lionofludesch
14th May 2024 20:28

Write in and cross your fingers?

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By Paul Crowley
14th May 2024 20:35

Who is doing the payroll?
If me I would look to open a new scheme. When you have it just p45 on the old scheme and start operating the new scheme.

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By FactChecker
14th May 2024 22:32

"it looks like this can be treated as a succession and the payroll carried on under a new name and PAYE scheme reference" ... is confusing multiple issues*.

You probably need proper advice from an experienced Payroll adviser, but take a look at:
https://www.gov.uk/hmrc-internal-manuals/paye-manual/paye30045

There are quite a few factors that will be pertinent but that you've not mentioned (in particular whether the business will be essentially unchanged other than in terms of its ownership - and whether the 'new owner' is prepared to take responsibility for the PAYE scheme being 'transferred' under succession rules).

N.B: * = succession precludes "under a new name and PAYE scheme reference"!

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Replying to FactChecker:
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By Sandnickel
15th May 2024 05:52

I'm curious as to why there is any doubt here.

The "old" business and the "new" business are effectively the same person therefore they will have responsibility for the previous PAYE scheme no matter what.

Client needs to contact HMRC asap to get this put into place and resolved.

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Replying to Sandnickel:
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By FactChecker
15th May 2024 21:12

Sorry ... busy day! But uncertain as to what you mean by "curious as to why there is any doubt here"?
I didn't think (and didn't intend to suggest) that there WAS any doubt ... my point being that when one entity 'replaces' another entity then, somewhat akin to when a company either acquires another company via all the shares or merely acquires the trading business, they need to decide at the outset whether or not the new owner is prepared to accept any/all historical liabilities that may be uncovered later.

IF the 'new owner' is prepared to take responsibility for the existing PAYE scheme then it can be 'transferred' (under succession rules); IF NOT then they can get a clean slate by applying for a new PAYE scheme (so no succession).

The two alternative routes have different implications (particularly on operating procedures affecting the existing Employees) ... neither of which is empirically 'right' or 'wrong', but they can't just be 'merged' into a hybrid set of processes.

And, based on what little we've been told, I totally disagree with your "The "old" business and the "new" business are effectively the same person."
As soon as I see the word 'effectively' a red flag is raised and listens out for the klaxon - in this case because the legal entity of 'old employer' and that of 'new employer' are categorically not the same entity (even if the 'person' sort of is).

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Replying to FactChecker:
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By Tax Dragon
15th May 2024 21:55

I would question whether either partner can wash their hands of past obligations, whichever route is chosen. Tax law isn't the only law.

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Replying to Tax Dragon:
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By lionofludesch
15th May 2024 22:30

Tax Dragon wrote:

I would question whether either partner can wash their hands of past obligations, whichever route is chosen. Tax law isn't the only law.

Correct. Any partner leaving is still liable for debts arising before he left.

Mind you, I'm not a lawyer. Nor an accountant.

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Replying to Tax Dragon:
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By FactChecker
15th May 2024 23:50

Interesting point ... "Tax law isn't the only law" is undoubtedly true, but which trumps which when the issue is legal responsibility for a specific tax (and the two sets of laws, as here, point to different parties holding liability)?

HMRC internal PAYE manual (as referenced earlier):
" .. an employer succession arises only where:
* The ownership of a business changes from one legal entity to another
And
* The new owner takes responsibility for the pay records of the old employer
Both conditions must be satisfied before it is considered that an employer succession has taken place and you must confirm this.

The new owner must be a different legal entity from the old employer.
For example, an existing sole trader or partnership employer that incorporates as a limited company or a new owner acquiring the business who is unconnected with the old employer."

I suspect we're looking down the wrong end of the telescope.
Without 'succession' (so new PAYE scheme) it seems fairly clear that no liability for the old scheme can be laid at the door of the new entity (albeit in this case the individual who is that new entity may still be liable as an ex-partner of the partnership to whom the old scheme was issued).
Whereas with 'succession' (so unchanged PAYE scheme retained) it is certainly HMRC's view that they can chase the new entity for any 'old' liabilities that happen to pre-date the new entity taking over (which again in this particular case is basically the same individual in a different 'guise').
Presumably in that no-succession scenario, if HMRC find themselves unable to obtain resolution of such 'old' liabilities from the new entity (under their PAYE rules) then they will simply move on to more general law (in this case whatever they can lay at the door of the ex-partners)?

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Replying to FactChecker:
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By Tax Dragon
16th May 2024 06:20

Tax law cannot make something that is not a legal entity into a legal entity. Where Parliament wants to tax a 'thing' that is not an entity, there are likely to be deeming provisions of some kind. Trusts provide an example - a trust isn't an entity (it's a relationship) so tax law taxes the trustees and deems them to be a single body of persons (or some such).

Partnership (in much of the UK) is similarly a relationship, not an entity. I admit below that I don't understand the legal position where a partnership is an employer. I don't need to, for my work (and if clients need legal advice, they need a lawyer). Sandnickel says below that PAYE law deems a partnership to be an entity. I suspect that that's not 100% precise, but I haven't looked. I can well believe that there is specific provision for partnerships and that they have a distinct treatment that distinguishes them from a sole trader, necessitating a change of registration when there's a change from one to the other. As for VAT (per Jason). In either case (payroll or VAT) with the option to carry the old registration across, with HMRC approval.

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Replying to Tax Dragon:
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By lionofludesch
16th May 2024 07:59

Tax Dragon wrote:

Tax law cannot make something that is not a legal entity into a legal entity. Where Parliament wants to tax a 'thing' that is not an entity, there are likely to be deeming provisions of some kind. Trusts provide an example - a trust isn't an entity (it's a relationship) so tax law taxes the trustees and deems them to be a single body of persons (or some such).

I'd caveat that by saying that statute law will always trump common law and most, if not all, of tax law is statute.

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Replying to lionofludesch:
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By Tax Dragon
16th May 2024 09:06

Yes possibly parliament can put what it wants where it wants (though I'm certainly no constitutional lawyer!)

But you wouldn't find a provision, say, deeming Rwanda a safe refuge for non-tax purposes in a finance act.

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Replying to Tax Dragon:
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By lionofludesch
16th May 2024 09:23

Tax Dragon wrote:

Yes possibly parliament can put what it wants where it wants (though I'm certainly no constitutional lawyer!)

But you wouldn't find a provision, say, deeming Rwanda a safe refuge for non-tax purposes in a finance act.

Wouldn't surprise me. Hope folk won't notice and cause a fuss.

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By Tax Dragon
15th May 2024 06:20

Depending where in the UK this is, a partnership may not have legal personality. I have not idea whether there is legislation specific to partnership employers, but my 'first principles' thought is that a joint-and-several employer has become a sole-responsibility [for future events] employer. (Not that I fully understand what I just said.)

But whatever - why does that trigger a need to change the payroll?

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Replying to Tax Dragon:
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By lionofludesch
15th May 2024 06:58

To stop HMRC's debt collection thugs pursuing a future debt from the retired partner?

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Replying to lionofludesch:
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By Tax Dragon
15th May 2024 07:06

Would you do the same if it was 3 partners reducing to 2?

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By lionofludesch
15th May 2024 07:17

Yes. Unless I was in Scotland.

Or overlooked it. Which is not unlikely.

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Replying to lionofludesch:
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By Tax Dragon
15th May 2024 07:44

And going the other way (2 to 3)? Or ABC to ABD? Any partnership change?

Must have been a relief when law firms became LLPs!

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Replying to Tax Dragon:
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By Paul Crowley
15th May 2024 09:53

Three to two is just a change in the partnership members. Same legal entity/
Two to one is a change of entity, partnership to sole trader.

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Replying to Tax Dragon:
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By Sandnickel
15th May 2024 07:39

A partnership is a separate legal entity for PAYE purposes and as such a new scheme is needed for a change to sole trader. If there was a change in partners it would still be a partnership and therefore no change required.

Good point about it being a legal partnership though which I had assumed it would be registered as such.

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Replying to Sandnickel:
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By Tax Dragon
15th May 2024 07:53

Thank you. So it's more like VAT (which I also don't know about) than the taxes I do know about.

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Replying to Tax Dragon:
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By Paul Crowley
15th May 2024 23:48

The VAT comparison is quite apt.
I would always advise against transferring the VAT number without good reason.
It draws a line in the sand on the old business. The new business is not then liable for prior VAT errors and evasion.
Does the new business that takes over the old PAYE scheme also take on its liabilities? No idea never even thought about it, but the admin bit of getting the agreements in place is probably more time than doing the P45 thing.

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Replying to Paul Crowley:
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By Tax Dragon
16th May 2024 09:02

And if there's good reason, 'twould be sensible also to have good warranties and indemnities.

Your line in the sand is as between the businesses[/business owners] - it wouldn't make liability go away (no "clean slate", at least not as I read that earlier comment).

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Replying to Tax Dragon:
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By Paul Crowley
17th May 2024 17:38

Agree. But the line in the sand means that the liability falls on those who made the error.

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By Matrix
16th May 2024 07:53

Is the business the same in all other respects, so the same name? I don’t see how this is a new employer but up to you if you want to set up new payroll and pension and transfer everyone over to a business in exactly the same name. If it is the legal side you are concerned about then indemnify the retiring partner, but wouldn’t that be dealt with anyway.

A long established client went from partnership to sole trader to partnership and it didn’t even occur to me to change the schemes. Although I only dealt with the second change and the schemes are already in the name of the business. I don’t know if the original payroll application was linked to the founding partner who is no longer a partner. HMRC already knows about all the changes for self-assessment and VAT so not sure if changing payroll would have achieved anything other than more work.

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Replying to Matrix:
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By FactChecker
16th May 2024 16:38

Although this is about to become pedantic, even by my standards, and it's probably my fault for trying to explain one aspect of the 'PAYE scheme' issue in terms of liabilities ... I think you may have missed one of the other aspects (albeit not one that seems to concern OP) when you say:

"Is the business the same in all other respects, so the same name? I don’t see how this is a new employer but up to you if you want to set up new payroll and pension and transfer everyone over to a business in exactly the same name. If it is the legal side you are concerned about then indemnify the retiring partner, but wouldn’t that be dealt with anyway."

What about the employees and their Employment contracts (which they hopefully have)? If those showed their employee as The Jo Bloggs Partnership but that no longer exists, then who is now their employer (Jo Bloggs isn't the same thing)?
It's not the historical (potential) liabilities, but also the responsibilities going forward that need to be resolved.
[I nearly appended 'surely' there just for TD, but decided it changed the tenor.]

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By Matrix
16th May 2024 19:17

That is a different name though? The employee contracts are a legal issue*. The PAYE account may be in the business name which may not have changed. Although I now see OP says it will be a new name so ignore me.

*By new employer I meant New Employer which is a term HMRC uses so this was just for the purposes of the payroll scheme.

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By taxdigital
16th May 2024 08:09

This is how would look at it:
Two sole traders got together and ran a business which was registered with HMRC as an employer. One of them got dropped and the business continues. Ignoring tax consequences, as far as PAYE registration is concerned I can’t see a succession in Reg 102 terms. The only question is in which partner’s name (on behalf of the partnership) the business was registered with HMRC as an employer.

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Replying to taxdigital:
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By Paul Crowley
17th May 2024 17:50

Just looked up one of our old ones. Currently both names on the scheme. Previously 4 names when mum and dad were partners.
Partnerships are getting to be fewer for my firm.
Our schemes all show partners' names, with some showing a trading as name as well.

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By taxdigital
18th May 2024 08:27

A partnership, unless an LLP, isn’t a legal entity. So, a A & B partnership should in my view be registered with HMRC as “Mr A and Mr B t/a AB partnership. A partnership (where the partners have joint and several liability) getting reduced to a sole trader should advise HMRC of the change of the structure as the leaving partner will be liable only up to the point where he was a partner. I think the scheme can continue subject to HMRC being notified.

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