Judgment summary
This appeal concerned a closure notice issued by HMRC under section 28B TMA 1970 on 5 October 2023 in respect of a partnership return submitted by Mr and Mrs Brown for the tax year ending 5 April 2016 (1).
The closure notice reduced the reported partnership profit of £146,013 to nil (1). The partnership return had treated income earned by Mr Brown through his diving activities as partnership income, allocated equally between Mr and Mrs Brown (2).
HMRC concluded that the income arose from Mr Brown's personal engagement with Subsea 7 Crewing Services Pte Ltd and did not constitute income of any partnership (3). During the hearing it became common ground that all of the income in the 2015/16 partnership return arose while Mr Brown was employed by Subsea 7 under a minimum-days commitment contract (5).
The Tribunal dismissed the appeal, finding that the income belonged to Mr Brown personally and could not properly be returned as partnership income (38, 40).
Background
Mr and Mrs Brown registered a partnership for self-assessment purposes on 7 August 2015 (7). On 3 January 2017 they submitted a partnership tax return for 2015/16 reporting profits of £146,013, allocated equally between them (8).
HMRC opened an enquiry into the return on 18 January 2017 under section 12AC TMA (9) and sought information on the basis on which income from Mr Brown's diving activities had been returned through the partnership (10). The dispute continued over several years, during which HMRC obtained documentation relating to Mr Brown's engagement by Subsea 7 (11).
On 5 October 2023 HMRC issued a closure notice amending the partnership return, reducing the reported profit of £146,013 to nil, on the basis that the income arose from Mr Brown's personal engagement with Subsea 7 (12). Mr and Mrs Brown's advisers appealed by letter dated 16 October 2023 (13), and the appeal was notified to the Tribunal on 25 October 2023 (14).
The Tribunal found that Mr Brown was a salaried employee from 1 January 2013 to 15 November 2015 under a minimum-days commitment contract, and a day-rate worker from 21 March 2016 onwards under an "as and when" arrangement, though no income from the later arrangement formed part of the disputed return (17, 18). Subsea 7 contracted with Mr Brown personally, not with any partnership, and no evidence was produced of any assignment, novation or other arrangement transferring contractual rights to a partnership (21, 22). No partnership agreement was produced, and neither Mr nor Mrs Brown attended the hearing or gave witness evidence (23).
Core dispute
The principal issue was whether income earned personally by Mr Brown, under an engagement the Appellants accepted constituted employment, could nevertheless properly be treated as partnership income and allocated between Mr and Mrs Brown for tax purposes (6).
The Appellants' case at the hearing was not founded on any developed analysis of section 15 ITTOIA 2005, but rather on the submission that a partnership existed between Mr and Mrs Brown and that previous accountants had prepared the returns on that basis (31). HMRC maintained that the income arose from Mr Brown's personal engagement with Subsea 7 and did not constitute partnership income (3, 38).
Court findings
The Tribunal held that the existence of a partnership does not, without more, establish that income earned by one partner is income of the partnership; this depends on the legal and factual basis on which the receipts were earned (32).
The earnings in question arose from contractual arrangements between Subsea 7 and Mr Brown personally, who personally performed the diving duties. Subsea 7 did not contract with any partnership, and there was no evidence of assignment, novation or other arrangement transferring the contractual rights to a partnership (33). The right to receive the income belonged to Mr Brown personally, not to any partnership (34).
The Tribunal found that section 15 ITTOIA 2005 did not assist the Appellants. As explained by the Supreme Court in Fowler v Revenue and Customs Commissioners [2020] UKSC 22, the provision deems qualifying employment activities to be the carrying on of a trade for specified income tax purposes but does not alter the source of the income or the identity of the person entitled to it (35).
Consistently with Fowler, the Tribunal noted that in Puttnam v HMRC [2019] UKFTT 389 (TC), Green v HMRC [2019] UKFTT 390 (TC), Corrigall v HMRC [2022] UKFTT 163 (TC) and Lowe v HMRC [2022] UKFTT 164 (TC), the Tribunal had rejected the contention that section 15 converts qualifying earnings into partnership income or creates a trade capable of ownership by a partnership, and the present Tribunal agreed with that reasoning (27, 28, 36).
The Tribunal concluded that neither the existence of a partnership, nor the preparation of previous returns on a partnership basis, nor the operation of section 15 ITTOIA 2005 provided any basis for treating Mr Brown's employment earnings from Subsea 7 as partnership income (37).
Outcome
The Tribunal concluded that the income in dispute arose from Mr Brown's employment with Subsea 7, that section 15 ITTOIA 2005 does not convert qualifying earnings into partnership income or create a trade capable of being carried on by or owned by a partnership, that the income did not constitute partnership income, and that HMRC correctly amended the partnership return for 2015/16 by reducing the reported profit to nil (39).
The appeal was dismissed (40).
Major issues / areas of contention
- Whether income earned by Mr Brown personally under an employment engagement with Subsea 7 could be treated as partnership income of Mr and Mrs Brown.
- Whether section 15 ITTOIA 2005 converts qualifying earnings of an employed diver into partnership income or creates a trade capable of ownership by a partnership.
- Whether the existence of a partnership between Mr and Mrs Brown, or prior preparation of returns on a partnership basis, was sufficient to establish that the receipts were partnership income.
- Whether HMRC correctly amended the 2015/16 partnership return by reducing the reported profit of £146,013 to nil.