HMRC have made a significant change to their guidance manuals recently regarding partner and members of LLPs expenses.
It had been a long standing principle, with HMRC approval, that business expenses incurred by partners (separate from the partnership itself) are tax deductible in arriving at the partners taxable profit share. For example, partners incurring home office expenses; this would typically not be borne by the partnership but the partner incurring the cost would be capable of claiming a tax deduction. The deduction was claimed via the partnership tax return, it did not matter that the expense had not gone through the partnership accounts.
This meant that as long as the expense was “wholly and exclusively” incurred for the purposes of the partnership business, a tax deduction was available regardless of whether it was the partner or the partnership that had incurred the expense. This was a practical way of dealing with partner expenses.
The Office of Tax Simplification, in the past, had suggested to improve the ability for partners to claim business expenses which they had incurred personally, that they should be able to make the claim on their own personal tax return and not the partnership return. This would have been a welcome change for partners but has not been introduced.
HMRC have now updated their guidance note at BIM82080 and have made the job of claiming partner expenses more difficult. The new guidance states “To be allowable as a deduction for tax purposes, the expense has to be an expense incurred (typically, paid) by the partnership. If the partnership does not bring the expense into the accounts, then it is not an allowable deduction.”
If this new guidance goes unchallenged, it will require partnerships and LLPs to bring into account partner expenses into their accounts. This will require deducting the partners expenses in the partnership accounts and making an equal and opposite adjustment to the partner’s profit share to achieve the same net tax position as in previous years. Whilst the main impact of these changes is administrative, this will clearly have a time and cost impact for businesses. For example, a change in profit share to accommodate the tax relief for partner expenses, could require an update to the partnership agreement!
If you are likely to be impacted by these changes, please contact Jonathan Cunningham using the details below.