So, You Think You’re A Partner?

Mark McLaughlin points out that it can sometimes be difficult to know whether an individual partner is employed or self-employed. 

It will often be clear whether someone is a partner in a partnership business and is a self-employed individual. However, even if there is a formal partnership identifying the business partners, it does not necessarily follow that all of the partners are self-employed. For example, there may be ‘salaried’ partners who are actually employees of the business.

The status of an individual (i.e. whether or not a partner, and/or self-employed or employed) may be even more difficult to determine if there is no evidence of a partnership agreement and if the extent to which they participate in the general management and administration of the business is unclear. 

HM Revenue and Customs (HMRC) often contend that an individual is employed rather than self-employed. However, the opposite was argued on the facts in Ashton v Revenue and Customs [2016] UKFTT 727 (TC). In that case, the sole proprietor (T) of a martial arts instruction business that had operated for some years prior to 2003 decided to set up a partnership with a number of his predecessor business’s employees as partners, including the taxpayer. From 2003 onwards, partnership returns were submitted to HMRC, on which the taxpayer was shown as a partner.

From 2003 until 2011 (when he left the business) the taxpayer submitted self-assessment returns as a partner, and also paid Class 2 National Insurance contributions. Following an enquiry into the taxpayer’s 2011 self-assessment return, HMRC raised assessments for 2008/09 to 2010/11 (earlier years were outside the time limit for assessment), on the basis that the taxpayer was a self-employed partner rather than an employee of the business.

The First-tier Tribunal noted from the evidence that the taxpayer took no financial risk in the business; partners did not have to pay money into the partnership when they joined, and received no money from the partnership when they left. In addition, the taxpayer did not apparently have any liability for business losses.

Furthermore, the taxpayer did not receive partnership accounts or a copy of the partnership agreement; nor did he take part in any partnership meetings. The partnership business was controlled by T, setting both the content of classes and the way in which classes were to be taught.

The tribunal concluded (on the balance of probabilities) that the taxpayer was not a partner in the partnership, as he was not carrying on business in common with other persons with a view to profit.

The tribunal went on to consider whether the taxpayer was an employee of the business. It noted that there was clear mutuality of obligations between the parties. There was also substantial control over when the taxpayer should work, and how the work was to be carried out. 

The taxpayer was paid a basic amount each month, and received a bonus for each month in which the karate school he taught at achieved a particular turnover figure. The business closed for two weeks in the summer and two weeks at Christmas, and all staff had to take their holidays at the same time. The payment of holidays was inconsistent with self-employment, as was payment for periods of illness.

The tribunal considered from the evidence that there was no significant change in the relationship between the parties in 2003, when the taxpayer was told that he was to be self-employed rather than an employee as he was previously. The taxpayer followed what he was told to do, relying on T. The tribunal concluded on balance that the taxpayer was an employee.

Aside from the normal considerations for determining whether an individual is a self-employed partner or an employee, an individual member of a limited liability partnership (LLP) is treated as a ‘salaried member’ (with income tax and National Insurance contributions applying as they would to an ordinary employee) if certain conditions are all met (ITTOIA 2005, ss 863A-863G). This measure is broadly aimed at those members of LLPs who are more like employees than partners in a ‘traditional’ partnership. These conditions need to be checked carefully in cases involving LLPs.