Vaines- attempt to claim personal expenses against partnership share fails in the Court of Appeal

Fri 09 Mar 2018

Peter Vaines has not succeeded in his appeal to the Court of Appeal (CA) against the decision of the Upper Tribunal that he could not claim any deduction for expenses that he incurred personally which were not included in the partnership’ return and computation. The UT had overturned a decision by the First-tier Tribunal in Vaines’ favour.
Vaines’ contended that he was entitled to be treated as carrying on his profession of solicitor in his own right, even though he was a member of SSD, a limited liability partnership (LLP) which is a corporate body but one required to be treated as a partnership for all tax purposes so long as it carries on a business. In doing so he was arguing against HMRC’s interpretation of the relevant law; that a partner can only include in his tax return his profit share as returned to HMRC in the LLP’s partnership return.
Vaines had personally made a payment of £215,455 to be released from any obligation to the bank, in respect of another partnership, “HHP” which had been wound up due to insolvency before he joined SSD. If he had not reached that compromise with the bank, the consequence would have been personal insolvency which would have prevented him from continuing in practice. However, the expense was never included in SSD’s accounts.
The CA took the view that for Vaines to be able to claim personal expenses he would have to be treated as carrying on a separate trade from that of SSD but that was not allowed by the legislation. In the lead judgment Henderson LJ said “The only trade which Mr Vaines carried on for income tax purposes . . . was the actual trade of SSD, deemed by [statute] to be carried on in partnership by its members. It is accordingly in the context of that deemed partnership trade of SSD, carried on collectively by Mr Vaines and his partners, that the deduction of his payment of £215,455 has to be justified.”
Therefore the CA concluded that Vaines’ payment could not be treated as an expense of the partnership, but only a personal expense of Vaines in protecting his ability to continue in the business of SSD.
The CA also considered whether the payment could have been claimed by SSD as a deductible expense. On this the conclusion was that as SSD declined to take on the liability or fund it, SSD did not regard the expense as one it might undertake wholly and exclusively for the purposes of its business. If SSD had adopted the payment the result might have been different but no ruling or opinioon was given on this point.
The CA was satisfied that the decision of the UT was entirely correct.