Thursday, October 23, 2008

Partnership tax enquiries

I've been hearing that HMRC are focusing more attention than ever before on the tax affairs of professional firms. And this means the tax affairs of more accountancy firms (and their clients eg: law firms and other professional partnership clients) are likely to come under increased scrutiny.

When I was in practice we tended to discourage clients from claiming excessive deductions in respect of business use of car, business use of home phones and payments ostensibly for spousal support. In addition to these items which are often still relevant, HMRC are asking about two other partnership expenses:
- ex-gratia payments to departing partners (paid to encourage them to go quietly and quickly - and thus for the benefit of the trade); and
- recruitment fees paid to source and secure new partners from outside the firm.

In both of the latter cases HMRC's starting point is that the expenditure does not qualify for tax relief. I'm not aware of anyone securing tax relief in eaither case - simply becuase HMRC are keeping their enquiries open in the hope of securing a definitive view in each case, once the matter has been before the Commissioners.

Finally there are two other partnership specific issues that also feature in HMRC enquiries:
- the basis of computing accrued income under FRS5 and UITF 40; and
- the justification or otherwise as regards provisions that are supposed to comply with FRS12.

Some people mistakenly assume that only Limited Liability Partnerships (LLPs) need worry about those accounting related issues. After all only LLPs are required to produce accounts that comply with Generally Accepted Accounting Principles (GAAP). But all partnerships - indeed all traders - are required to compute their tax charge by reference to profits calculated in accordance with GAAP. Thus all partnerships are required to comply with the same accounting requirements, if not in their accounts then in their adjusted profit computations for tax purposes.

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