First-tier Tribunal (Tax)

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Cite as: [2009] STI 1925, [2009] SFTD 160, [2009] UKFTT 78 (TC)

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Self v Revenue & Customs [2009] UKFTT 78 (TC) (29 April 2009)
INCOME TAX/CORPORATION TAX
Partnership

TC00046

Appeal number SC/3110-11/2008

INCOME TAX – payments made by firm to partners who were asked to withdraw from the partnership – whether payments chargeable to income tax as profits – yes – or whether payments were expenditure which should have been deducted by the firm in computing its profits – no - appeal dismissed – ICTA 1988 ss 18 and 74

FIRST-TIER TRIBUNAL

TAX

GRAHAM MORGAN Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

HEATHER SELF Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

JUDGE : NUALA BRICE

Sitting in public in London on 24 and 25 March 2009 and 3 April 2009

David Milne QC with Barrie Akin Counsel for the Appellants

Michael Gibbon QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

The appeals

These appeals concern the tax treatment of certain payments made by a firm of chartered accountants to partners who were asked to withdraw from the firm. As well as paying each partner a share of the profits, calculated up to the date of withdrawal, the firm also made a further payment which was equivalent to the partner's share of the profits for twelve months. It is the treatment of those further payments which is disputed. The Appellants say that they were not payments of profits and the Revenue say that they were. The firm making the further payments was the partnership of Ernst & Young. In June 2001 the partnership transferred its undertaking to the limited liability partnership of Ernst & Young LLP. Both are referred to as the firm. The Appellants accepted that the tax treatment of a limited liability partnership was assimilated to that of a partnership for all material purposes.

The Appellants are two partners who were asked to withdraw from the firm, namely, Mr Graham Morgan (Mr Morgan) and Mrs Heather Self (Mrs Self). Mr Morgan appeals against a decision of The Commissioners for Her Majesty's Revenue and Customs (the Revenue) that a further payment of £338,000 received by him from the firm in the year ended 5 April 2001 was chargeable to income tax as profits. Mrs Self appeals against a decision of the Revenue that a further payment of £350,000 received by her from the firm in the year ended 5 April 2002 was chargeable to income tax as profits.

I was informed that a number of other former partners and members of the firm (about thirty-five in number) had appealed against similar decisions of the Revenue.

The legislation

The relevant extracts from the legislation in force at the relevant time are set out in the Annex to this Decision. Section 18 of the Income and Corporation Taxes Act 1988 (the 1988 Act) provides that tax is charged under Case II of Schedule D on the annual profits arising from the carrying on of a profession. Section 74 provides that, in computing the amount of the profits to be charged under Case II, no sum shall be deducted in respect of any expenses not being money wholly and exclusively expended for the purposes of the profession. Section 42 of the Finance Act 1998 provides that, for the purposes of Case II, the profits of a profession must be computed in accordance with generally accepted accounting practice, subject to any adjustment required by law.

The provisions about returns are contained in the Taxes Management Act 1970 (the 1970 Act). Section 8 contains the provisions about personal returns and sections 12AA to 12AC contain the provisions about partnership returns. These latter sections provide for a partnership return to be made by the partnership which return must include a partnership statement showing the amount of income accruing to the partnership and the amount of income accruing to each partner (section 12AB(1)(a)). Section 8(1) provides for each person to make a personal return and to deliver with it "such statements and documents relating to the information in the return as may reasonably be required". Section 8(1B) provides that the return of a person who carries on a profession in partnership shall include the amount which, in any relevant statement, is stated to be equal to his share of any income. Relevant statement is defined in section 8(1C) as a partnership statement made under section 12(AB).

The issues

The Appellants appealed because they were of the view that the further payments received by them did not constitute profits of the firm and so were not chargeable to income tax under section 18 of the 1988 Act. They were also of the view that the further payments should have been deducted by the firm in computing the amount of its profits under section 74 of the same Act. The Revenue's primary argument was that the further payments were payments of profits and so were chargeable to income tax and were not deductible by the firm. Alternatively they argued that, because the firm had made a partnership return under the 1970 Act, which included a partnership statement showing the amounts of the further payments as being income accruing to each partner, it followed that each partner was obliged to include the same amount as income in his or her personal return and that was the amount upon which each partner was chargeable to tax. The Appellants did not agree and argued that they were obliged under section 8(2) to make returns which were correct and complete to the best of their knowledge even if their returns were not consistent with the partnership statement.

Thus the issues for determination in the appeal were:

(1) whether the further payments made to the Appellants were profits, and so chargeable to income tax under section 18 of the 1988 Act, or whether they were amounts which should have been deducted by the firm in computing its profits under section 74; and,

(2) if the further payments were not profits, whether the further payments were in any event chargeable to income tax in the hands of the Appellants on the ground that they had been returned by the firm in the partnership statement as income accruing to the Appellants.

The evidence

There was an agreed statement of facts not in dispute which was, however, amended during the course of the oral evidence given at the hearing. Three bundles of documents were produced. Oral evidence was given on behalf of the Appellants by Mr Graham, Mrs Self, and Mr Kim Harry Hayward. Between 1998 and 2002 Mr Hayward was a partner/member of the firm and also a member of its Council, having been elected to the Council as a regional representative.

Oral evidence on behalf of the Revenue was given by Mr Nicholas Charles Edward Land. Mr Land became the senior partner (later called the Chairman) of the firm in 1995 and remained Chairman until he retired from the firm in 2006. Where the evidence of Mr Land and Mr Hayward, about the role of the Council and the management of the firm, was inconsistent I preferred the evidence of Mr Land whose knowledge and experience of the Council and of the management of the firm was necessarily greater than that of Mr Hayward.

The facts

From the evidence I find the following facts.

The Appellants

Mr Morgan qualified as a chartered accountant in 1975. In October 1979 he joined the firm of Arthur Young McClelland Moores & Co (Arthur Young) and became a tax partner in May 1987. On 1 September 1989 Arthur Young merged with another firm to become Ernst & Young. Mr Morgan remained as a partner until he withdrew from the firm on 31 March 2001.

Mrs Self qualified as a chartered accountant in July 1983. She had joined Arthur Young as a trainee in 1980 and stayed with that firm after qualification. She remained when Arthur Young became Ernst & Young in September 1989 and became a partner in the firm in July 1992. She remained as a partner, and later a member, until she withdrew from the firm on 31 December 2001.

The constitution of the firm

The procedure surrounding the withdrawal of the Appellants from the firm took place within the context of the constitution of the firm. When, on 28 June 2001, the partnership of Ernst & Young transferred its business assets and undertaking to the limited liability partnership of Ernst & Young LLP, all the then partners in the partnership (including Mrs Self) became members of the limited liability partnership.

The constitutional documents which governed the partnership were: a partnership agreement made with effect from 1 September 1989; the Fundamental Rules (the Rules) attached to the partnership agreement; and Regulations issued by the Council of the firm. The constitutional documents which governed the limited liability partnership were a members' agreement of 28 June 2001, the Fundamental Rules attached to the agreement (the Rules) and the Regulations made under the Rules (the Regulations). In all material particulars the contents of the constitutional documents of the limited liability partnership were the same as those of the partnership. Although the following facts refer only to the partnership they apply also to the limited liability partnership.

Each partner was given a Partners' Handbook which contained the material relating to each partner's relationship with the firm. The Handbook contained copies of the constitutional documents and also had sections dealing with legal and regulatory matters, partners' finance and partners' general and personal administration. The introduction to the Handbook stated that the terms of the partnership (namely, the partnership agreement, the Rules and the Regulations) were binding on each partner as a matter of contract and that the other material was regarded as binding under the principle of utmost good faith.

Clause 1 of the partnership agreement provided that the parties would carry on the business of chartered accountants together as partners in accordance with the provisions of the agreement and of the Rules, as if the Rules formed part of the agreement. The partnership agreement also provided that the Council of the firm had power to make Regulations.

The structure of the firm

Rule 2 described the structure of the firm and the separate roles of the partners in general meeting, the Council and the Executive. The supreme authority was the partners themselves in general meeting. The partners had to approve the accounts and also approved material changes in the management structure and major mergers, acquisitions, disposals or changes of legal form.

Rule 2.1(b) provided that the Council was responsible for considering and approving all major policy decisions of the firm and such matters had to be referred to the Council by the Executive. The Council also had power to issue and amend Regulations. The Regulations provided that the Council had fifteen members. The senior partner (later called the Chairman) together with all six other members of the Executive were members of the Council and in addition there were eight other members elected by the partners to give regional representation. Thus the elected members were always in a majority. The elected members were all partners in the firm who continued with their normal responsibilities. In practice the Council was scheduled to meet six times a year but additional meetings could be called where specific issues needed to be considered.

Rule 2.1(a) provided that the management of the firm was delegated to a committee known as the Executive which was headed by the Chairman. Rule 2.2(d) provided that the Executive was responsible for the general management and administration of the firm, for formulating policy for submission to the Council, and for implementing policy approved by the Council. The Regulations provided that the Executive comprised the Chairman and up to six other partners who were nominated by the Chairman for approval by the elected members of the Council. These nominated members spent all their time in the management of the firm. In practice one member of the Executive was called the UK Managing Partner.

Partners' retirement arrangements – the constitutional provisions

Rule 3 contained the provisions about partners' retirement arrangements. Rule 3.1 referred to voluntary retirement and Rule 3.2 referred to compulsory retirement. Rule 3.2 provided that the Executive was required to give notice to the Council of its intention to terminate a partner's membership of the firm and that each partner recognised and agreed that the Executive might exercise such a decision within their absolute discretion. A partner in receipt of a compulsory retirement notice from the Executive could, within ten business days, request the Chairman to convene a meeting of the elected members of the Council. The partner the subject of the compulsory retirement notice was entitled to attend, and speak at, that Council meeting. The elected members of the Council had the power to nullify the compulsory retirement notice served by the Executive. Rule 3.2 also provided that a partner compulsorily retired was entitled to receive such additional payment (if any) as might be approved by the Council. Thus, under the Rules, the decision to terminate a partner's membership of the firm was a matter for the Executive but any additional payment had to be approved by the Council.

Rule 3.6 contained provisions relating to rights and duties on retirement. It provided that, when a person ceased to be a partner, his interest in the assets and future profits of the firm ceased immediately. The retiring partner was entitled to receive repayments of his capital (with interest) and his share of the profits calculated up to the date upon which he ceased to be a partner. Rule 3.6 also provided that a retired partner should not at any time disclose confidential information concerning the firm or its clients and should provide full assistance to the firm. Rule 3.7 contained the post-termination obligations of a partner. Each partner covenanted that he would not, for a period of twelve months from his termination date, undertake any business in competition with the firm. Rule 7 dealt with goodwill and provided that for the purpose of any change in the partnership no value should be ascribed to goodwill.

Section 3 of the Handbook dealt with partners' finance. Paragraph 6 of section 3 dealt with "partners leaving". Paragraph 6.1 was headed "Profit share" and provided that partners leaving during the year were offered an option as to how their fixed share of profit was calculated. Paragraph 6.2 provided:

"6.2 Special allocations of profits

In certain circumstances partners leaving are entitled to a special allocation of profit. Such amounts are usually paid gross at the time the partner leaves."

The accounts and the allocations of profits

Regulation 2 provided that the accounts of the firm were to be prepared on the basis of such accounting principles as the Council approved. A copy of the firm's profit and loss account and balance sheet was to be sent to each partner and, after approval, was to be signed on behalf of the partners by the Chairman and the Finance Partner. All the matters shown by any profit and loss account or balance sheet which had been approved were binding on all the partners for all purposes of the firm. Regulation 2.2 provided that "the profits and losses of the Firm shall be divided between partners on a points basis after deducting specific payments to partners as determined by the Executive".

In practice the firm's accounting year ended on 30 June in each year. Divisible profits were allocated among the partners by reference to the points basis. Under this basis each partner was allocated a certain number of points. Before June 2001 the points were allocated at the beginning of the year; after that date they were allocated at the end of the year. At the end of the year the profits of the firm were calculated and the total profits available for division was divided by the aggregate number of points in issue for the year; this calculation yielded a figure of "pounds per point". The "pounds per point" figure was then multiplied by each partner's number of points to arrive at that partner's share of the divisible profits.

At the hearing reference was made to the accounts of the firm for the year ended 30 June 2000. It was not disputed that the principles adopted in those accounts represented the practice of the firm in the years of assessment the subject of this appeal. The accounts were audited by BDO Stoy Hayward who gave their opinion that the accounts gave a true and fair view of the profits of the firm. In arriving at the total amount of the profits, deductions were made for staff costs, including salaries, redundancy and ex gratia payments. No deductions were made in respect of similar payments to partners. The total amount of profits was shown and, in the notes to the accounts, note 8 stated that this total amount was made up from three elements, namely, remuneration, payments to partners withdrawing and pension contributions.

Partners' retirement arrangements – the practice

The practice adopted by the firm in connection with compulsory retirements was that periodically the firm's regional management would determine which partners would be asked to retire either because of concerns regarding the conduct or performance of a partner or if there was a reduction in the demand for the services which that partner provided. The regional management would put the names of such partners to the Executive who might add additional names. The Executive would then determine the payments to be made to such partners and would then refer the matter to the Council for discussion and approval.

The normal practice was that a partner who was asked to retire would receive his share of profits calculated under the points basis up to the date of his retirement and would also receive a further payment. The amount of the further payment was usually equivalent to the partner's share of the profits for twelve months. More would be paid to partners over the age of 50 years and less to those who had not been partners for very long. No retention was made from the further payments on account of tax although the firm always retained the estimated amount of tax attributable to a partner's share of profits calculated under the points basis. On the rare occasion when a partner was asked to retire for a misdemeanour there would be no, or a minimal, further payment. .

I accept the evidence of Mr Land that, when the Council had approved the proposals of the Executive as to the payments to be made to the departing partners, each partner was initially requested to withdraw from the firm on the financial terms determined by the Executive and approved by the Council. Most such partners did then withdraw by consent. A partner who did not withdraw by consent would be given a compulsory retirement notice and would receive the same payments as if he had consented to withdraw. When the Council and Executive had decided that a partner had to leave then he got the same money irrespective of whether he withdrew by consent or was compulsorily retired.

2000-2001 - The events surrounding the retirement of Mr Morgan

On 11 December 2000 Mr Morgan was called to a meeting and was asked to withdraw from the firm on 31 December 2000. He was told that he would receive the balance on his capital accounts; his car would be transferred to him at an agreed valuation; he would receive his share of the profits calculated on the points basis up to his leaving date, and he would also receive a payment equal to "one year's money". Because the actual profits for the accounting year ending on 30 June 2001 could not be ascertained until some time after that date, Mr Morgan was given the option of having his share of profits calculated on the points basis either computed immediately on the amount of the then forecasted profits for the year or computed at a later date on the amount of the actual profits when known. He chose the former option. Mr Morgan was handed the draft of a letter setting out the matters discussed.

There was some negotiation after the meeting and it was agreed that Mr Morgan would withdraw from the firm on 31 March 2001.

On 14 December 2000 Mr Morgan had a meeting with Mr Mark Molyneux Mr Molyneux was the UK managing partner of the firm and also a member of the Executive. Mr Molyneux handed Mr Morgan the final version of the letter which recorded the terms of the arrangements which would apply on Mr Morgan's withdrawal from the firm. The following extracts from that letter (referred to as the departure letter) are relevant in Mr Morgan's appeal:

"I write to you to set out the matters we discussed in relation to your withdrawal from the partnership.

1. You will withdraw from the partnership on 31 March 2001 … .

2. Your profit share for the 9 months ended 31 March will be calculated based upon 260 points at £1300 each. …

3. Alternatively you can opt to be paid proportionately the actual profit for the twelve months to 30 June 2001, payable on the normal distribution dates. Please let me know which alternative you choose.

4. In addition, you will also receive a further payment of £338,000 as well as the release of certain of your tax balances.

5. You will be responsible for tax on these sums. Tone Howard can explain the tax treatment in more detail if you wish. …

10. The firm will be under no financial obligation to you other than in relation to the matters referred to above following withdrawal. …

16. I would remind you that you will remain bound by the restrictive covenants in the firm's Fundamental Rules which contain various non-compete clauses. … The firm may be prepared to waive certain of the restrictions imposed by these covenants but I will consider those at the time and on a "case by case" basis. …

17 Following your withdrawal you will be subject to the continuing obligation under Fundamental Rule 3.6(g) not to disclose any confidential information concerning your business, clients, dealings, methodologies or affairs of the firm. I would remind you of your obligations of confidentiality in relation to clients' information and affairs and in particular, your personal obligations under various confidentiality agreements which will continue in effect after your withdrawal.

Once you have had an opportunity to consider the contents of this letter please confirm your agreement to these arrangements by signing and returning the enclosed copy of this letter to me."

The amount at issue in Mr Morgan's appeal is the further payment of £338,000 mentioned in paragraph 4 of the letter of 14 December 2000. Mr Morgan signed and returned a copy of the letter. He did not call a meeting of the elected members of the Council under the Rules. On 22 February 2001 Mr Morgan wrote by email to Mr Tone Howard as suggested in paragraph 5 of the letter of 14 December 2000. He made a number of enquiries of which the last was:

"Could you explain how my termination payment falls to be taxed. I assume that it is paid as an additional profit share of the current year and therefore taxed in 2000/01."

Mr Tone Howard replied by email on 26 February 2001 and said:

"Additional profit share and thus taxed in 2000/2001 (with fixed profit share to March 2001 and profits for the year to June 2000."

In April 2001 Mr Morgan received from the firm the payments due to him on his retirement and also what was called a "final leaver's statement". This itemised the calculation of the sums due to him on his leaving date of 31 March 2001. It started with capital balances and then included the following:

"Plus:

Fixed profit share £253,500

Special Allocation £338,000".

On 29 January 2002 Mr Morgan submitted his tax return for the year ending on 5 April 2001. This included the payment of £338,000 as a profit share. However, Mr Morgan later took the view that that amount was a non-taxable ex gratia payment and so he amended his return on 15 March 2002

The partnership return rendered by the firm for 2001/2002 contained a partnership statement stating an amount which was Mr Morgan's share of profits in the accounting year ending on 30 June 2001. This amount included the further payment of £338,000.

2001 – the events surrounding the retirement of Mrs Self

On 31 October 2001 Mrs Self was invited to attend a meeting and she was asked to withdraw from the firm on 31 December 2001. She was told that she would be paid an amount equivalent to what was described as "twelve months' remuneration". She was handed a letter (referred to as a departure letter) of the same date which was signed on behalf of Mr Molyneux and which was in terms very similar to that handed to Mr Morgan on 14 December 2000. The amount of the further payment mentioned in paragraph 4 of the letter was £350,000. Mrs Self signed a copy of the letter and returned it on 5 November 2001. She did not call a meeting of the elected members of the Council under the Rules.

Some time later, and before 18 December 2001, Mrs Self received a copy of a document entitled "Action by Partners Leaving the Partnership". (Mr Morgan did not recall seeing a similar document but the wording indicated that the document had been used by the firm before the establishment of the limited liability partnership). The document stated that it had been prepared to assist partners about to withdraw from the partnership and should be read in conjunction with the Partners' Handbook and, in particular, with Rule 3, Regulation 7 and the Partners' Handbook section 3 paragraph 6. It went on to deal with a number of matters, one of which was "repayments and drawings". The relevant parts of this read:

"A partner withdrawing will receive on that date:

1. Capital balances less transfer value of the car …

2. Any tax retentions held.

3. Any unpaid prior year distributions

4. A special allocation of profits where the terms involve such a payment,

5. Less the tax debt due to the firm.

6. Less any loan amounts outstanding."

On or about 15 January 2002 Mrs Self received from the firm what was called a "final leaver's statement". This itemised the calculation of a number of sums due to her. It started with capital balances and then included the following:

" Plus:

Fixed profit share £175,000

Special Allocation £350,000".

The partnership return rendered by the firm for 2002/2003 contained a partnership statement stating an amount which was Mrs Self's share of profits in the accounting year ending on 30 June 2002. This amount included the further payment of £350,000.

2002 –the events surrounding the retirement of Mr Hayward

In 2002 the Executive brought a number of proposals to the Council for the compulsory retirement of members of the limited liability partnership. Mr Hayward recalled that the Council discussed the difficulties that some of the retiring members would face in finding other partnerships or employment and it was mentioned that the sums which would be paid to them by the firm would ease the financial burden. A question was asked as to whether the further payments would be made to a retiring partner who immediately joined a competitor. Reference was then made to the restrictive covenant which prevented a partner from competing with the firm for twelve months and the view was expressed that the further payments recognised that the effect of the restrictive covenant was that a retiring partner would be unable to work for twelve months and to that extent the further payments protected the firm and its client base. I accept the evidence of Mr Land that it was very rare for the firm to enforce the restrictive covenant and this was only done if a partner left to join a competitor.

Shortly after the discussion by the Council Mr Hayward was asked to retire from the firm in circumstances similar to those of Mr Morgan and Mrs Self. He received a further payment similar to those in issue in these appeals and paid income tax on his further payment. He is one of the former partners and members of the firm who are supporting these appeals.

In the light of those facts I turn to consider each of the issues in the appeals.

Issue (1) – Were the further payments profits?

The first issue in the appeals is whether the further payments made to the Appellants were profits and so chargeable to income tax under section 18 of the 1998 Act or whether they were amounts which should have been deducted by the firm in computing its profits under section 74.

The arguments

For the Appellants Mr Milne QC argued that the further payments did not constitute a share of the taxable income of the firm and were not taxable in the hands of the Appellants. The division of the profits of the firm was a matter for the Executive and profits were usually divided by reference to the points basis. The departure letters of 14 December 2000 and 31 October 2001 which were given to the Appellants did not refer to the further payments as special allocations of profit. Neither Appellant had any contractual right to a further payment as they were in the discretion of the Council under Rule 3.2. The payments were not treated like other payments of profits as no tax was deducted from them. Mr Milne went on to argue that the further payments were made to protect or preserve the goodwill of the firm and in the circumstances that each Appellant waived any entitlement to any further monetary payment and to a hearing by the elected members of the Council. The payments were also made to alleviate the hardship caused by the fact that the restrictive covenants meant that the Appellants might be unable to practice as chartered accountants for the period of twelve months. The payments were not of an income nature and were not paid in respect of the performance of any service. The payments constituted deductions from the firm's profits rather than an allocation of profits.

Mr Milne cited Heastie v Veitch & Co (1933) 18 TC 305. He distinguished MacKinlay v Arthur Young McClelland Moores & Co (1989) 62 TC 704 and argued that the further payments were outside the profit sharing arrangements and that the Appellants did not continue to act as partners after the payments were made; also the further payments were made as a result of a wholly collateral bargain. He also referred to the Inland Revenue Business Income Manual BIM 38120.

For the Revenue Mr Gibbon QC argued that the further payments were payments of profits. He cited Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 at 912F for the principle that it was necessary to consider all the facts and circumstances. The constitutional documents made it clear that the Executive could make special allocations of profits before the divisible profits were allocated by reference to the points basis and the actions of the Executive were binding on the partners. The departure letters, and the answer given by Mr Tone Howard to Mr Morgan's enquiry, were consistent with the conclusion that the additional payments were profits of the firm. Mr Gibbon distinguished Heastie v Veitch and argued that that case was authority only for the principle that if a property is owned by one partner then the payments of rent by the partnership is deductible by the partnership. He distinguished MacKinlay although he relied upon the general principle that payments to a partner are distributions of profit unless there is a clear intention otherwise.

The authorities

The authorities cited by the parties identify the relevant legal principles. The issue in both Heastie and MacKinlay was whether certain sums had been expended wholly and exclusively for the purposes of the trade of the partnership and so were deductible under section 74 of the 1988 Act. In Heastie the Court of Appeal held that a payment of rent by a partnership to a single partner who owned the property was deductible from the profits of the partnership.

MacKinlay (1989) concerned the deductibility of removal expenses of partners who had been required by the firm to move to different branches. The House of Lords held that such removal expenses were not deductible. At 755B Lord Oliver distinguished Heastie and held that the principle that, for tax purposes, a partnership should be treated as a separate entity from the individual partners comprising the firm, did not apply in relation to sums received by a partner from partnership funds in his capacity as a partner. At 755C he said:

"But we are not concerned here with sums coming to the hands of [the individual partners] as a result of some wholly collateral bargain between them and the firm … What they received, they received as partners in the firm. The fact that they were partners and were going to continue to act as such was indeed the very justification for the receipt."

At 756F Lord Oliver considered whether there was an analogy with the position of an employee but concluded that there was not. He said:

"An employee has no interest in the property or profits of the firm and anything paid to him by way of additional remuneration for acting as an employee and to secure his continued loyalty to the firm cannot easily fail to be deductible as an expenditure exclusively for the purpose of the firm's business. … A partner, on the other hand, …is in a quite different position. What he receives out of the partnership funds falls to be brought into account in ascertaining his share of the profits of the firm except in so far as he can demonstrate that it represents a payment to him in reimbursement of sums expended by him on partnership purposes in the carrying on of the partnership business or practice. .. or a payment entirely collateral made to him otherwise than in his capacity as a partner. … It may be that in relation to a particular receipt by a partner of partnership moneys not falling under either of the above heads, his co-partners are agreeable to his retaining it without bringing it into account so that to that extent the divisible profits at the end of the year are notionally reduced by the amount retained; but this cannot alter the fact that what is retained is part of the profits which would otherwise be divisible. What is taxable is the actual not the notional profit and what has to be demonstrated if a deduction is to be allowed for tax purposes in respect of moneys paid to a partner is that it was paid exclusively for the purposes of the partnership business."

In Investors Compensation Scheme (1998) Lord Hoffmann gave guidance upon the construction of contractual documents. He said that it is necessary to ascertain the meaning which the documents convey to a reasonable person having all the background knowledge reasonably available to the parties. However, permissible background does not include declarations of subjective intention made by the parties. Also, the meaning of words does not always depend upon the words used.

From these authorities I derive the principles that, in deciding whether payments made by a partnership to an individual partner are profits of the firm, or expenditure which should be deducted from the profits, it is necessary to decide whether the payments were received by the individual partner in his capacity as a partner in the firm and whether that was "the very justification for the receipt". What an individual partner receives out of the partnership funds is part of his share of the profits unless he can demonstrate that it represents a payment to him in reimbursement of sums expended by him on partnership purposes or an entirely collateral payment made to him otherwise that in his capacity as a partner. Finally, in considering the contractual documents it is necessary to bear in mind that the meaning of words does not always depend upon the words used.

Reasons for decision

I now turn to apply those principles to the facts as found. The constitutional documents of the firm make it clear that the partners were carrying on business in partnership and that the terms of the partnership were binding on each partner. The terms of the partnership were contained in the partnership/members' agreement, the Rules and the Regulations.

Rule 3 dealt with the retirement of partners. There was no provision for additional payments to be made to partners who retired voluntarily. Rule 3.2 provided that a partner who was compulsorily retired was entitled to receive such additional payment (if any) as approved by the Council. This provision does not specifically state whether the additional payments were to be made out of profits. However, section 3 of the Partners' Handbook also contained provisions about partners leaving and paragraph 6.2 provided that, in certain circumstances, partners leaving were entitled to "a special allocation of profits which were usually paid gross". Again, this provision leaves open the possibility that payments could be made to retiring partners which were not allocations of profits.

However, Regulation 2.2 provided that profits were to be divided between the partners on a points basis "after deducting specific payments to partners as determined by the Executive". This provision therefore assumes that some of the profits could be allocated as specific payments leaving the remainder of the profits to be allocated on the points basis. The accounts of the firm were prepared on the basis of accounting principles and all matters shown in the profit and loss account in the signed accounts were binding on all the partners. In the actual accounts the additional payments were shown as deducted from the total amount of the profits and Note 8 made it clear that the total amount of the profits included payments made to partners withdrawing from the firm.

Thus the constitutional documents indicate that payments made to partners leaving the firm could include both special allocations of profits as well as profits calculated by reference to the points basis and the accounts confirmed that the further payments made to retiring partners were in fact made out of profits.

Turning to the facts surrounding the withdrawal of the Appellants, paragraph 4 of each departure letter referred to the payments as further payments. The email from Mr Tone Howard to Mr Morgan of 26 February 2001 makes it clear that the further payment was viewed as an "additional profit share". In the leavers' statements the further payments are shown after the fixed profit share (calculated under the points basis) and are referred to as a "special allocation", using the words in paragraph 6.2 of section 3 of the Handbook. Mrs Self also received the document entitled "Action by Partners Leaving the Partnership" which referred to "a special allocation of profits".

It will be seen that a number of different phrases have been used to describe the payments. Rule 3.2 referred to additional payments; Regulation 2.2 referred to specific payments; the Partners' Handbook referred to special allocations of profits; the departure letters mentioned further payments; the leavers' statements referred to a special allocation within the context of profit and The Action by Partners Leaving the Partnership document also referred to a special allocation of profits. However, following the guidance of Lord Hoffmann in Investors Compensation Scheme I have not regarded these different words as necessarily having different meanings because all the evidence points to the conclusion that they were all capable of including the same meaning.

It is also the case that the constitutional documents referred to additional or further payments within the context of the compulsory retirement of partners whereas both Appellants withdrew without a compulsory retirement notice. However, the evidence was that the payments made to partners who withdrew by consent were calculated on the basis that, if consent was withheld, a compulsory retirement notice would be given on the same financial terms.

I conclude that the provisions of the constitutional documents, considered in the light of the facts surrounding the retirement of both Mr Morgan and Mrs Self, point very strongly to the conclusion that in fact the further payments were made out of profits.

In the light of that conclusion I return to the legal principles and ask whether the further payments made to the Appellants were received by them in their capacity as partners in the firm or whether they were entirely collateral payments made to the Appellants otherwise than in their capacity as partners. The fact that the further payments were made and received within the context of the partnership agreement, the Rules and the Regulations, which provided that such payments were only made to partners, indicates that the payments were received by the Appellants in their capacity as partners. The fact that they were partners at the time the payments were agreed, and the fact that the payments were offered within the context of their retirement as partners, was the very justification for the receipt of the payments. It is not relevant that the further payments were received after the dates of withdrawal; the shares of profits calculated under the points basis were received at the same time but it was not suggested that those payments were not profits.

The Appellants argued that the further payments were entirely collateral payments made to them otherwise than in their capacity as partners. In the light of Rule 7, which provided that on any change of partnership no value should be ascribed to goodwill, I cannot accept that the additional payments were made to protect or preserve the goodwill of the firm. It is the case that the Appellants accepted the terms of their departure letters, and decided not to call a hearing of the elected members of the Council, but that was not an entirely collateral bargain. It is not relevant that the payments were not made in respect of the performance of any service as this was a partnership and not a contract of employment. I accept the evidence of Mr Land that, in making the further payments, the firm recognised that, by asking a partner to withdraw, the firm was taking away his immediate livelihood and that it might be some time before the partner found alternative employment; accordingly; the further payments gave the departing partner some financial security and a source of income at what could be a difficult time. Also, it may well be that the further payments alleviated the hardship caused by the fact that the restrictive covenants meant that the Appellants might be unable to practice as chartered accountants for the period of twelve months. However, neither of these considerations amount to an entirely collateral bargain so as to result in the payments being made to the Appellants otherwise than in their capacity as partners. In any event, the Appellants became bound by the restrictive covenants when they became partners in the firm. I do not therefore agree that the further payments were entirely collateral payments made to the Appellants otherwise than in their capacity as partners.

Before reaching a final view on this issue I consider the other arguments of the Appellants. I agree that the division of the profits of the firm was a matter for the Executive and profits were usually divided by reference to the points basis. However, the constitutional documents also make it clear that additional payments could be made out of profits before the balance of the profits were allocated under the points basis. Although the departure letters of 14 December 2000 and 31 October 2001 did not refer to the further payments as special allocations of profit the whole context within which the payments were made indicate that they were special allocations of profit. Rule 3.2 provided that the additional payments were within the discretion of the Council, and Regulation 2.2 gave the Executive a discretion about specific payments and so, to that extent, the further payments were discretionary. However, the payments were determined within the context of the constitutional documents which were binding on all the partners and, to that extent, they were contractual. I accept that the payments were not treated like other payments of profits as no tax was deducted from them but that does not mean that they were not payments of profits.

I conclude that the further payments were made to the Appellants in their capacity as partners and were not entirely collateral payments made to them otherwise than in their capacity as partners. That means that the further payments were payments of profits and so chargeable to income tax under section 18 of the 1998 Act; they were not amounts which should have been deducted by the firm in computing its profits under section 74. That means that the appeal is dismissed..

Issue (2) – Were the payments taxable because the firm had returned them as profits?

The second issue is whether the further payments were chargeable to income tax in the hands of the Appellants on the sole ground that they had been returned by the firm in the partnership statement as income accruing to the Appellants. The decision on the first issue means that the appeal is dismissed and that I do not have to decide the second issue. However, as arguments were put I briefly express my views.

The arguments

For the Appellants Mr Milne argued that the charging provisions were in the 1988 Act, sections 16 and 111(3) of which provided that tax was payable on profits and that an individual partner was taxable on his share of the profits. These provisions could not be over-ruled by the provisions of the 1970 Act which were of an administrative nature only. The 1970 Act enabled the Revenue to establish the tax liability of the firm and to check that against the returns of the individual partners. If the returns of the firm and of the individual partners were not consistent then the Revenue could open an enquiry either into the partnership return or into the returns of the individual partners. Individual partners could disagree with the partnership as to the correct computation of profits for tax purposes. The provisions of the 1970 Act could not cut down the right and obligation of the individual partners to render what they regarded as complete and correct returns and to appeal from a decision of the Revenue with which they did not agree. Mr Milne cited Re Sutherland and Partners' Appeal [1994] STC 387 at 391 for the principle that Parliament could not have intended to take away the right of appeal of a person assessed to tax.

For the Revenue Mr Gibbon argued that the whole structure of the 1988 Act and the 1970 Act indicated that a partnership could have only one amount of profits for division among the partners and the total of that amount had to be divided among the partners. Sections 12AA(2) and 12AB of the 1970 Act provided that the partnership return had to include a partnership statement showing the income of the partnership and how that income was shared among each of the partners. Section 8 (1B) of the same Act provided that the return of an individual partner had to include the amount equal to his share of income as stated in that partnership statement. The whole scheme of the legislation, including sections 12ABA(3), 12ABB(6), 28B(4) and 30B(2) (which provided that where amendments were made to a partnership return then the personal returns of the individual partners were also amended). supported this view. If an individual partner was of the view that payments to him were not profits then he could raise that matter with the partnership.

Reasons for decision

I recall that this issue could only arise if the Appellants had been successful on the first issue and if the further payments were not chargeable to income tax as profits.

Section 8(1) of the 1970 Act provides that, if so required, an individual must deliver a return together with such statements as relate to the information in the return. In my view a partnership statement will relate to the information contained in the return of an individual who carries on a profession in partnership. Section 8(1B) provides that the return of a partner must include any amount shown in the partnership statement as equal to his share of income. There is therefore a statutory obligation for a partner to include in his return whatever amount is shown in the partnership statement as equal to his share of the income of the partnership. This accords with the scheme of the legislation and enables the Revenue to ensure that the amounts in the partnership return are consistent with the amounts returned by the individual partners.

.However, the question then arises as to what happens if the partnership and the partner do not agree about the nature of payments made. In these appeals the firm was of the view that the payments were profits and therefore income but the Appellants disagreed. A case could arise where a firm was of the view that payments were not income but the individual partner thought that they were. How are such matters to be resolved? If a disagreement were to arise outside the context of the tax legislation then no doubt it could be resolved by the dispute resolution machinery in the partnership agreement. However, if the disagreement fundamentally affects a tax liability then the Revenue will also have a view and it seems that the appropriate forum for resolving the dispute should be the tax appeal procedure. The statutory provisions in the 1970 Act assume that the partnership return is right unless corrected by the Revenue (in which case the Revenue can also correct the individual partner's return). However, there is no provision which deals with the case where an individual partner takes the view that the partnership return and partnership statement is wrong. If, in such a case, the partner does complete his return including as his income the amount shown in the partnership statement he cannot also declare that the return is correct and complete to the best of his knowledge as he would be of the view that the amount returned was too high or too low. .

A somewhat similar problem arose in Sutherland where a partnership of six general practitioners appealed against a partnership assessment. Before the appeal was heard the partnership divided between five doctors on the one hand and a single doctor on the other. The General Commissioners determined the assessment and the single doctor required them to state a case for the opinion of the High Court. The question then arose as to whether one partner had the right of appeal against the determination of the General Commissioners under section 31 of the 1970 Act and also having regard to section 56 of the same Act which provided that only an appellant could ask for a stated case. The Court of Appeal held that legislation should be interpreted so as to give effect to Parliament's presumed intention. Having regard to the procedural code in the 1970 Act it was clear that it was the intention of Parliament that one jointly assessed taxpayer should have a right of appeal. At 391f Sir Donald Nicholls VC said that the statutory provisions did not slot neatly into place.

"On the one hand, the statutory scheme for appeals is not geared to cases where a single assessment is made on more than one person and the taxpayers disagree about what should be done. On the other hand, Parliament cannot be taken to have intended that in such a case one of the persons assessed should have no right of appeal … .

(At 391) Legislation is to be interpreted so as to give effect to Parliament's presumed intention, so long as this is clear, provided always the language of the statute fairly admits of the interpretation in question. Here, having carefully considered the procedural code for tax appeals set out in Part IV of the [1970 Act] we are of the clear view that Parliament must have intended that one jointly assessed taxpayer shall have a right of appeal even if the other person or persons named in the assessment do not wish to appeal. Accordingly, section 31 is to be construed as enabling any person assessed to tax to bring an appeal in respect of the assessment, whether he has been assessed alone or jointly with others."

The statutory provisions relevant to this appeal do not slot easily into place either. At first sight they do not appear to deal with the case where a partnership and an individual partner disagree about the nature of payments made to the individual partner, which nature affects the tax liability of the individual partner. At the relevant time in Sutherland section 31 provided that an appeal might be brought against an assessment to tax and so the language of the statute fairly admitted of the interpretation given by the Court of Appeal. It is not so easy to identify how the language of the current version of section 31 could fairly be interpreted so as to give a partner a right of appeal where he disagrees with the partnership statement as, if the Revenue are right, there will be no assessment or amendment of a self-assessment to appeal.

I have therefore re-examined the provisions of section 8 and 9 of the 1970 Act in the light of these difficulties. Section 8(1) begins by stating the purpose of the whole section which is to establish the amount to which the individual is chargeable to tax and the amount payable by him by way of tax. It seems to me to be implicit in these provisions that what must be established is the right amount upon which the individual is chargeable to tax and the right amount of tax payable by him, no less but also no more. If that is right then the whole section must be interpreted in the light of that purpose. Section 8(1)(a) then goes on to provide that the return must contain "such information as may reasonably be required in pursuance of the notice"; the notice of course is the notice requiring the return. Section 8(1)(b) finally contains the provision which, with section 8(1B), requires the production of the partnership statement and the inclusion in the return of the amount shown in it as equal to the individual's share of the income of the partnership. .

Although the provisions of section 8(1)(b) and 8(1B) impose a clear statutory obligation to provide the partnership statement with the return, and to include the amounts in it in the return, those subsections have to be read within the context of the whole of section 8 which includes section 8(1)(a). It seems to me that the language of section 8(1)(a) fairly admits of the interpretation that the totality of the information referred to must ensure that the return is complete and so must include any additional information needed to supplement the partnership statement in order to comply with the purposes of the section which is to establish the right amount of tax. This would be the case both if the individual thought that the amount in the partnership statement was too high (as in this appeal) or too low, that is, if it under-stated what the individual thought was the right amount. This interpretation is also consistent with section 8(2) because the provision of the additional information would then enable the individual to declare that the return was correct and complete. The same interpretation would then carry through into section 9. Under section 9(1) the self-assessment of the individual would be on the basis of the complete information in the return including both the partnership statement and any supplementary information.

It seems to me that this interpretation would also be consistent with the whole scheme of the legislation as the Revenue would be provided with the partnership statement but would also be provided with any supplementary information needed to support a claim that the partnership statement either over-stated or under-stated the profits paid to the individual partner. If the Revenue were not satisfied that the partnership statement was wrong they could amend the self-assessment of the individual partner this giving the individual partner a right of appeal.

I have reached these views with some hesitation and it is with some relief that I recall that I do not have to decide this issue. However, if the Appellants had succeeded on the first issue, and if they were not chargeable to tax on the amount shown in the partnership statement, it does not seem right that they should become chargeable just because of the contents of a partnership statement which had been shown to be wrong.

Decision

75. My decisions on the issues in the appeal are:

(1) that the further payments made to the Appellants were profits, and so chargeable to income tax under section 18 of the 1988 Act; they were not amounts which should have been deducted by the firm in computing its profits under section 74; and

(2) that the decision on the first issue means that the appeal must be dismissed and that I do not have to consider the second issue. However, as arguments were put I briefly express my views which are that I would prefer an interpretation of the 1970 Act which resulted in the return of an individual partner being both complete and correct to the best of his knowledge; that would mean that the information sent with the return should include any information required to supplement the partnership statement if the individual thought that the amount in the partnership statement was too high or too low, that is, if it over-stated or under-stated what the individual thought was the right amount. That interpretation would mean that the further payments would only be chargeable to income tax in the hands of the Appellants if they were so chargeable following a correct application of the charging provisions and not on the sole ground that the further payments had been returned by the firm in the partnership statement.

The appeal is, therefore, dismissed.

Right of appeal to Upper Tribunal

Section 11 of the Tribunals, Courts and Enforcement Act 2007 provides that any party to a case has a right of appeal to the Upper Tribunal on any point of law arising from a decision of the First-tier Tribunal. The right may be exercised only with permission which may be given by the First-tier Tribunal or the Upper Tribunal. Rule 39(2) of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 SI 2009 No. 273 provides that a person seeking permission to appeal must make a written application to the Tribunal for permission to appeal which application must be received by the Tribunal no later then fifty-six days after the date that the Tribunal sends full written reasons for the Decision. Rule 29(5) provides that an application for permission to appeal must identity the decision of the Tribunal to which it relates, identify the alleged error or errors in the decision and state the result the party making the application is seeking.

This document contains the full written reasons for the Decision.

NUALA BRICE

JUDGE

RELEASE DATE: 29 April 2009

SC/3110/2008

SC/3111/2008.

25.04.09.

Annex

Extracts from the legislation

The 1988 Act

Part 1 (sections 1 to 20) of the Income and Corporation Taxes Act 1988 (the 1988 Act). contains the provisions about the charge to tax and the relevant parts of section 18 provide:

"18 Schedule D

(1) The Schedule referred to as Schedule D is as follows-

SCHEDULE D

Tax under this Schedule shall be charged in respect of-

(a) the annual profits or gains arising or accruing-

(ii) to any person residing in the United Kingdom from any trade profession or vocation .. "

Part IV (sections 53 to 130) of the 1988 Act contains the provisions relating to the Schedule D charge. Chapter V of Part IV (sections 74 to 99) contains the computational provisions and the relevant parts of section 74 provide:

74 General rules as to deductions not allowable

(1) Subject to the provisions of the Tax Acts, in computing the amount of profits to be charged under Case I or Case II of Schedule D no sum shall be deducted in respect of-

(a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation."

Additional provisions about computation are contained in the Finance Act 1998 and the relevant parts of section 42 provide:

"42 Computation of profits of trade, profession or vocation

(1) For the purposes of Case I or II of Schedule D the profits of a trade, profession or vocation must be computed in accordance with generally accepted accounting practice subject to any adjustment required or authorised by law in computing profits for those purposes. … ".

Chapter VII of Part IV of the 1988 Act (sections 111 to 118) contain provisions about partnerships and successions. The relevant parts of section 111 provide:

"111 Treatment of partnerships

(1) Where a trade or profession is carried on by persons in partnership, the partnership shall not, unless the contrary intention appears, be treated for the purposes of the Tax Acts as an entity which is separate and distinct from those persons.

(2) So long as a trade or profession is carried on by persons in partnership, and any of those persons is chargeable to income tax, the profits or losses arising from the trade or profession ("the actual trade or profession") shall be computed for the purposes of income tax in like manner as if-

(a) the partnership were an individual; and

(b) that individual were an individual resident in the United Kingdom.

(3) A person's share in the profits or losses arising from the actual trade or profession which for any period are computed in accordance with subsection (2) above shall be determined according to the interests of the partners during that period."

The relevant provisions of section 118ZA provide:

"118ZA Treatment of limited liability partnerships

(1) For the purposes of the Tax Acts, where a limited liability partnership carries on a trade, profession or other business with a view to profit –

(a) all the activities of the partnership are treated as carried on in partnership by its members (and not by the partnership as such) … ."

The 1970 Act

The provisions about the administration and collection of tax are in the Taxes Management Act 1970 (the 1970 Act). Part II (sections 7 to 12) contains the provisions about returns of income and gains. The relevant parts of sections 8 and 9 provide:

"8 Personal return

(1) For the purposes of establishing the amounts in which a person is chargeable to income tax and capital gains tax for a year of assessment, and the amount payable by him by way of income tax for that year, he may be required by a notice given to him by an officer of the Board-

(a) to make and deliver to the officer …. a return containing such information as may reasonably be required in pursuance of the notice, and

(b) to deliver with the return such accounts, statements and documents, relating to the information contained in the return as may reasonably be so required.

(1B) In the case of a person who carries on a trade, profession or business in partnership with one or more other persons, a return under this section shall include each amount which, in any relevant statement, is stated to be equal to his share of any income, loss, tax, credit or charge for the period in respect of which the statement is made,

(1C) In subsection (1B) above "relevant statement" means a statement which , as respects the partnership, falls to be made under section 12AB of this Act for a period which includes , or includes any part of , the year of assessment or its basis period.

(2) Every return under this section shall include a declaration by the person making the return to the effect that the return is to the best of his knowledge correct and complete."

9. Returns to include self-assessment

(1) Subject to subsections (1A) and (2), every return under section 8 … of this Act shall include a self-assessment, that is to say-

(a) an assessment of the amounts in which, on the basis of the information contained in the return and taking into account any relief or allowance a claim for which is included in the return, the person making the return is chargeable to income tax and capital gains tax for the year of assessment; and

(b) an assessment of the amount payable by him by way of income tax, that is to say, the difference between the amount in which he is assessed to income tax under paragraph (a) above and the …amount of any income tax deducted at source … ."

(4) Subject to subsections (5) below-

(a) at any time before the end of the period of nine months beginning with the day on which a person's return is delivered, an officer of the Board may by notice to that person so amend that person's self-assessment as to correct any obvious errors or mistakes in the return … ; and

(b) at any time before the end of the period of twelve months beginning with the filing date, a person may by notice to an officer of the Board so amend his self-assessment as to give effect to any amendments to his return which he has notified to such an officer."

Sections 12AA to 12AC contain provisions about partnership returns and the relevant parts of these sections provide:

"12AA Partnership return

(1) Where a trade, profession or business is carried on by two or more persons in partnership, for the purpose of facilitating the establishment of the following amounts, namely-

(a) the amount in which each partner chargeable to income tax for any year of assessment is so chargeable and the amount payable by way of income tax by each such partner … …

an officer of the Board nay act under subsection (2) or (3) or both.

(1A) For the purposes of subsection (1) above-

(a) the amount in which a partner is chargeable to income tax … is a net amount, that is to say, an amount which takes into account any relief or allowance for which a claim is made, and

(b) the amount payable by a partner by way of income tax is the difference between the amount on which he is chargeable to income tax and the aggregate amount of any income tax deducted at source .. ."

(2) An officer of the Board may by notice given to the partners require such person as is identified in accordance with rules given with the notice … -

(a) to make and deliver to the officer … a return containing such information as may reasonably be required in pursuance of the notice; and

(b) to deliver with the return such accounts, statements and documents relating to information contained in the return as may reasonably be so required.

(3) An officer of the Board may by notice given to any partner require the partner … -

(a) to make and deliver to the officer … a return containing such information as may reasonably be required in pursuance of the notice; and

(b) to deliver with the return such accounts and statements as may reasonably be so required."

12AB Partnership return to include partnership statement

(1) Every return under section 12AA of this Act shall include a statement (a partnership statement) of the following amounts, namely:

(a) in the case of the period in respect of which the return is made …

(i) the amount of income … which, on the basis of the information contained in the return … has accrued to … the partnership for the period in question ,,, and

(b) in the case of each such period … and each of the partners the amount which … is equal to his share of that income … ."

12ABA Amendment of partnership return by taxpayer

(1) A partnership return may be amended by the partner who made and delivered the return … by notice to an officer of the Board. …

(3) Where a partnership return is amended under this section , the officer shall by notice to each of the partners amend-

(a) the partner's return under section 8 … of this Act, …

so as to give effect to the amendment of the partnership return.

12ABB Correction of partnership return by the Revenue

(1) An officer of the Board may amend a partnership return so as to correct obvious errors or omissions in the return (whether errors of principle, arithmetical mistakes or otherwise). …

(6) Where a partnership return is corrected under is section, the officer shall by notice to each of the partners amend-

(a) the partner's return under section 8 … of this Act, …

so as to give effect to the correction of the partnership return.

12AC Power to enquire into partnership return

(1) An officer of the Board may enquire into-

(a) the return on the basis of which a person's partnership statement was made under section 12AB of this Act …

if … he gives notice in writing of his intention to do so to that person … . "

Part IV of the 1970 Act (sections 28A to 43B) deals with assessments and claims. Section 28A contains the provisions relating to the completion of an enquiry into a personal return and section 28B contains the provisions relating to the completion of an enquiry into a partnership return. The relevant parts of sections 28B and 30B provide:

"28B Completion of enquiry into partnership return

(1) An enquiry under section 12AC(1) of the Act is completed when an officer of the Board by notice (a "closure notice") informs the taxpsyer that he has completed his enquiries and states his conclusions.

In this section "the taxpayer" means the person to whom notice of enquiry was given … .

(2) A closure notice must either-

(a) state that in the officer's opinion no amendment of the return is required, or

(b) make the amendment of the return required to give effect to his conclusion.

(3) Where a partnership return is amended under subsection (2) above, the officer shall by notice to each of the partners amend-

(a) the partner's return under section 8 … of this Act, or ..

(4) Where a partnership return is amended under subsection (2) above, the officer shall be notice to each of the partners amend –

(a) the partner's return under section 8 … of this Act, …

So as to give effect to the amendment of the partnership return.

.

30B Amendment of partnership statement where loss of tax discovered

(1) Where an officer of the Board or the Board discover, as regards a partnership statement made by any person … in respect of any period-

(a) that any profits which ought to have been included in the statement have not been so included, or

(b) that an amount of profits so included is or has become insufficient, or

(c) that any relied (or allowance) claimed … is or has become excessive,

the officer …. may … by notice to that partner so amend the partnership return as to make good the omission or deficiency or eliminate the excess.

(2) Where a partnership return is amended under subsection (1) above, the officer shall by notice to each of the relevant partners amend-

(a) the partner's return under section 8 … of this Act, …

so as to give effect to the amendments of the partnership return.

31 Appeals: right of appeal

(1) An appeal may be brought against-

(a) any amendment of a self-assessment under section 9C of this Act ,,,;

(b) any conclusion stated or amendment made by a closure notice under section 28A or 28B of this Act;

(c) any amendment of a partnership return under section 30B(1) of this Act ….; or

(d) any assessment to tax which is not a self-assessment.

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