Date of incorporation? Income belongs to company not partners

In Clive Kingdon, Terry Stead & Anne Kingdon v HMRC [2022] TC08633, the First Tier Tribunal (FTT) allowed an appeal against assessments which increased taxable partnership income following the incorporation of the business. The date of transfer was earlier than HMRC contended and the profits belonged to the company, not the partners.

Clive Kingdon, Terry Stead & Anne Kingdon were partners in a partnership, Rota Rod.

• During 2005 the business of Rota Rod was transferred to an existing company owned by the partners.
• The appellants’ position was that the transfer took place on 31 March or 1 April 2005 and that there was no partnership income for 2005-06, however:
  • On the advice of the partners' then accountant, the submitted partnership returns for 2005-06 and 2006-07 showed the partnership as trading and two of the partners declared partnership profits on their personal returns for those periods.
• HMRC had opened and closed an enquiry into the 2005-06 partnership return without any amendments. New evidence then came to light following a raid on the taxpayer’s former accountant, Christopher Lunn. He was found guilty of four counts of cheating the public revenue in 2015.
• As a result, HMRC contended that the transfer of the partnership business took place on 2 August 2005 and used the Discovery provisions to assess the appellants to partnership income for 2005-06 of £95,388.
• The partners Appealed.

The FTT allowed the appeal:

• Although there was an absence of real evidence, with only three letters dated 2007, 2009 and 2011, which contradicted each other, the judge accepted the partners’ contention that the transfer took place on or around 1 April 2005.
  • The evidence to the contrary which came from Lunn & Co could not be relied upon and should be taken with a pinch of salt.
  • It was the partners who were carrying on the business. If they were able to say when, in their view, the business transferred, that was the best source of that information.
  • The date of transfer was on or around 1 April 2005 and all profits after that date belonged to and were taxable upon the company.
• The partners did not act negligently. They put their financial and tax affairs in the hands of an ostensibly competent firm of accountants and tax advisers, who initially demonstrated no lack of competence or ability. Once they realised that Lunn & Co were not acting in their best interests they sacked them. This was responsible behaviour even though they did admit to signing whatever was put in front of them by Mr Lunn as they did not have sufficient expertise in financial, accounting and tax matters to be able to check their tax returns.

Comment

This case raises a few points. On incorporation it is important to establish a clear cut-off date for the transfer of the unincorporated business to the company or income could be incorrectly subjected to higher rates of Income Tax instead of Corporation Tax. There should be contemporaneous written evidence to support that date.

Finally the importance of picking a good agent to handle your tax affairs. The appellants were looked upon favourably by the tribunal because they had acted responsibly and swiftly in sacking their accountant and this gave them credibility before the tribunal. Had they acted differently the judge may have taken a different view to their account of events on incorporation and given the lack of evidence they may have lost their appeal.

Useful guides on this topic

Incorporating an existing business
How to transfer an existing sole trader's business by incorporation into a company.

Partnerships: How to prepare partnership and partners tax returns
How to prepare partnership returns. How are partnership profits calculated? How are corporate members of partnerships taxed? What are the differences between the tax treatment of individual and corporate partners? Are there anti-avoidance provisions to consider?

Incorporation checklist
This checklist covers how to incorporate an existing business.

Discovery Assessment (subscriber)
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? What are your rights of appeal and defences?

External link

Clive Kingdon, Terry Stead & Anne Kingdon v HMRC [2022] TC08633