The High Court upheld a decision of the general commissioners that, although companies set up by the taxpayer in partnership with his wife were separate legal entities, there was no reason why a company could not be a member of a partnership; and that, for VAT purposes, the true position in this case was that the taxpayers, together with all the companies, constituted a partnership (as opposed to the partnership consisting of the taxpayer and his wife alone) which carried on the whole of their business.

Facts

The taxpayers (a husband and wife) had commenced in business by giving piano lessons and selling a few used pianos. In 1989, they started to sell new pianos and over a period of time eight companies were formed to carry on various aspects of the business. All new pianos were purchased by the taxpayers in partnership and all cash sales of new pianos were made by that partnership. The taxpayers acquired all stock and paid the majority of overheads and the companies held no assets. Management charges, including VAT, were raised by the taxpayers on all of the companies, but there was no evidence that the companies traded. Returns submitted by the taxpayers between 1995 and 2002 showed outputs of £452,582 and inputs of £779,783 with no record of a build-up of stock.

Customs took the view that the returns did not reflect the trade of the taxpayers and calculated from figures produced by the bookkeeper that VAT had been underdeclared by £119,830. Assessments were issued for that amount. The taxpayers submitted that, in the mark-up exercise used to calculate the tax, all elements of judgment were missing and other factors were ignored. In the opinion of the taxpayers, Customs’ errors were of such magnitude that the assessments were invalid.

The VAT and Duties tribunal held that the taxpayers had failed to produce records or co-operate with Customs and the want of information made it difficult for the officers to make proper assessments of the tax due. On the basis of the material before them, Customs had tried hard to assess the tax as accurately as possible. There were some mistakes in the calculations and three assessments were conceded by Customs as being out of time but, in the judgment of the tribunal, the assessments had been made to best judgment. The tribunal directed itself that, notwithstanding the taxpayers’ arguments that the companies were separate legal entities, there was no reason why a company could not be a member of a partnership. The evidence pointed to the fact that there was a single business being carried on by the taxpayers together with the other companies in partnership, with the possible exception of one. The assessments were directed by the tribunal to be reduced to £69,218 ([2004] BVC 4071; Decision No. 18,499). The taxpayers appealed.

Issue

Whether the tribunal had erred in law in finding that the taxpayers and the companies were carrying on business in partnership.

Decision

Lewison J (dismissing the appeal) said that it had been Customs’ case from an early stage that the taxpayer together with the companies which they had set up were trading in partnership. On a number of occasions over several years that was challenged by or on behalf of the taxpayers, who contended that that was not so because each of the companies was a separate legal entity and each was trading on its own account. There had been no legal argument on the topic of partnership at the hearing but, since the matter had been raised over the years, the tribunal thought it right to give a view.

The facts, that all purchases were made by the partnership, that the partnership determined which company (if any) dealt with which piano or catgegory of pianos, that most receipts were paid into a single bank account and into others only when they needed topping up, all led to the conclusion that there was a single business being carried on by the partnership together with all the companies, with the possible exception of one, and that together the taxpayers and the companies were carrying on the business of buying and selling pianos, whether new or second-hand, or on commission, as a partnership. They may not have intended it to be a partnership, but it has long been the law that in spite of a trader's intention, if the facts establish a partnership, then a partnership was what it is.

Nothing had been put before the court to indicate that there had been any error of law in the way in which the tribunal had directed itself and so the taxpayers’ appeal would be dismissed.

Chancery Division.
Judgment delivered 3 April 2008.