The High Court held that a VAT assessment was ineffective to impose liability on two out of four taxpayers who had signed form VAT2 purporting to register a partnership for VAT where on the evidence they were not in fact partners.

Facts

The four taxpayers carried on the business of a bar and restaurant in partnership. The third taxpayer applied to register the business for VAT in the trading name of the partnership with effect from 1 January 2002. In the accompanying form VAT2 (the prescribed form under reg. 5(1) of the Value Added Tax Regulations 1995 (SI 1995/2518) where an application for registration was made by a partnership) each of the four taxpayers stated that they were partners in the business and signed the form. Accordingly, Revenue and Customs exercised the power in the Value Added Tax Act 1994 (VATA 1994), s. 45(1) and completed the registration in the trading name (‘TBC’). When no VAT returns were made in respect of the relevant period, Revenue and Customs raised assessments against TBC under VATA 1994, s. 73. The taxpayers appealed contending that they had not been involved in making taxable supplies at the relevant time and that the assessment was in any event excessive. A VAT tribunal found, as a preliminary issue, that, on the evidence, the first and second taxpayers had never been partners in the business but that the third and fourth taxpayers were in partnership from 14 February 2002 until the late summer of that year. On that basis they held that the assessment was invalid but expressed the view that, had it been raised against the third and fourth taxpayers alone, the only possible challenge to it would have been on grounds of quantum or lack of best judgment.

Revenue and Customs appealed contending that: (1) the tribunal had failed to recognise that the taxpayers were all registered for VAT by virtue of the registration in the name of TBC and accordingly were taxable persons for VAT purposes and liable to account for VAT; (2) by virtue of the Partnership Act 1890, s. 14 (or at common law) the taxpayers were estopped from denying their status as partners with regard to the VAT liabilities of TBC as a result of having held themselves out as partners in the application for registration; and (3) even if the first and second taxpayers were not to be treated as partners in TBC, the assessment issued against TBC was nonetheless valid against the third and fourth taxpayers in the light of the partnership which the tribunal had found to exist between them.

Issue

Whether the taxpayers were stopped from denying their status as partners; and whether the assessment was valid against the third and fourth taxpayers.

Decision

Patten J (allowing the appeal) said that it was not the partnership as such which was the taxable person for VAT purposes. Nor was registration under s. 45(1) the separate registration of each of the partners as individuals. They were deemed to be registered on a collective basis so that one or other of them would become liable to separate registration as the taxable person in relation to another business carried on either solely or in a different combination.

For the definition of ‘taxable person’ in VATA 1994, s. 3 to apply, there had to be a person who was registered or liable to be registered for VAT. In the present case, the first of those conditions was not satisfied in respect of the first and second taxpayers. There was no partnership comprising the four taxpayers and therefore they could and did not constitute together a person for the purpose of s. 3. Absent a partnership between all four taxpayers, the assessment was ineffective to impose any liability on the first and second taxpayers unless the signature by them of the VAT2 form had the effect of holding them out and rendering them liable as partners to Revenue and Customs for VAT purposes.

Liability as a partner included joint liability with the other partners for all the debts and obligations of the partnership incurred while that person was a partner. That would continue until the partner in question gave notice to the creditor of his ceasing to be a partner. Until then the creditors were entitled to treat all apparent members of the firm as still being members. Liability for VAT again continued until notice of a change in the partnership was given to Revenue and Customs.

The reference to giving credit in s. 14(1) of the 1890 Act, however widely interpreted, did not include the registration of the taxpayers for VAT as partners. It denoted a private law transaction of some kind with the partnership which arose either directly or indirectly out of reliance on the representations made. The only obvious consequence of the VAT2 form was a registration of the business in the name of TBC. For all the taxpayers to be a taxable person, they had to be carrying on business in partnership within s. 45(1). There had to be an actual partnership and not a situation in which some of the individuals involved merely held themselves out as partners by entering their names on form VAT2. The conditions set out in s. 45(1) could not be satisfied by a process of estoppel. A taxing statute required them actually to exist.

However the assessment was valid and enforceable against the third and fourth taxpayers since, on the tribunal's findings, they were in partnership during the relevant period to which the assessment related and notice was never given by the third defendant that he had ceased to be a partner. A registration under s. 45(1) was only effective to include in the collection of individuals registered under the partnership name those who were at the relevant time carrying on business in partnership within s. 45(1).

Only a ‘person’ who made taxable supplies might be registered and the inclusion of non-partners on form VAT2 was of no effect. The registration could only take effect in relation to those on the form who were partners and could therefore constitute a taxable person for VAT purposes. The registration was therefore effective in this case to include the third and fourth taxpayers as partners in TBC and the assessment issued against TBC was correctly raised against them.

Chancery Division. Judgment delivered 31 July 2006.