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Jonathan Schwarz, author of 'Booth & Schwarz: Residence, Domicile and UK Taxation, looks at the factors determining the residence of a partnership for tax purposes.

Introduction

Residence is a personal attribute – a quality which attracts to a person by virtue of the strength of the association with a particular place or country. Partnership is the relationship which subsists between persons carrying on a business in common with a view of profit. (Partnership Act 1890 s 1) In England and Wales, a partnership has no existence independent of its constituent members but, in Scotland, it is ‘a legal person distinct from the partners of whom it is composed’. (Partnership Act 1890 s 4(2)) The characterisation of a foreign legal entity as a partnership is by analogy to partnerships in the UK applied to the rights, legal rights and obligations under the governing foreign law. (Memec plc v IRC [1998] STC 754 (CA)) Thus in principle any partnership that does not have legal personality under its governing law cannot have the quality of residence attributed to it. The direct tax treatment of partnerships is consistent with this approach by treating each partner as individually carrying on a notional trade in respect of the partnership trade actually carried on in common. (See generally, ITTOIA 2005 Pt 9). Residence or an analogous quality is however imputed by statute in the case of firms with a foreign element for limited purposes. First, the remittance basis is made applicable to the foreign profits of a trade carried on in partnership where the control and management of the partnership’s trade is outside the UK. (ITTOIA 2005 s 857) Secondly, tax treaty protection from UK tax on the trading profits of partnerships resident outside the UK or whose trade is controlled and managed outside the UK is overridden in the case of UK resident partners. (ITTIOA 2005 s 858)

Control and Management

Although a partnership, lacking in legal personality, cannot, in principle, have a residence, the Court of Appeal in Padmore v Inland Revenue Commissioners [1989] STC 493 (CA) observed that under the predecessor to ITTOIA 2005 Pt 9 a residence is ascribed in the legislation to some partnerships. This residence is by reference to a test of control or management of the trade or business. Under the predecessor legislation, the partnership, rather than each partner, was assessed to income tax on its trading profits. Fox LJ also observed that the test for partnerships was statutory, unlike the judge-made test for companies. (See Chapter 6 of the book on the residence of companies). Despite the different origins of the corporate and partnership tests, there has been little disagreement that the same analysis applies to question whether the control and management of a partnership carried on outside the UK as that which the courts have formulated for ascertaining the residence status of companies.

In Padmore the partnership was governed by the laws of Jersey. The overwhelming majority of the partners were resident in the UK. The business of the partnership was carried on from its offices in St Helier, Jersey; and its day-to-day business dealt with by two managing partners who were Jersey residents. General meetings of the partners were held in Jersey or Guernsey (but nowhere else) four times a year, or more frequently as occasion demanded. At those meetings policy matters were discussed and the decisions taken were thereafter implemented by the Jersey resident managing partners. On those facts, it was common ground that the control and management of the business of the partnership was situated abroad.

Similarly in Newstead (HM Inspector of Taxes) v Frost (1975-1981) 53 TC 525, a Bahamian partnership established to exploit the services and intellectual property of the entertainer David Frost, a UK resident, outside the UK was found by the Special Commissioners as a fact, without analysis of the legal principles, to be controlled and managed abroad on the basis that the partnership meetings and all the activities of the partnership took place outside the UK.

Specific examination of the relationship between the partnership and corporate principles by the First-Tier Tribunal in Mark Higgins Rallying (a firm) v Revenue & Customs [2011] UKFTT 340 (TC) resulted in the conclusion that:

‘[T]he appropriate test for the location of control and management of the business of a partnership is that adopted by the courts in relation to residence of companies. We note the same conclusion was reached by HMRC and stated in their Manual; also that it was the one argued for before us by the Partnership.’(para 51)

In October 1991 Mr Dixon and Mr Higgins, both Manxmen resident in the Isle of Man, entered into a partnership to combine Mr Dixon's management and commercial experience with Mr Higgins’ driving skills. Mr Higgins relocated to the UK in 1993. No records were kept of any partners’ meetings. The partners reconstructed a diary of partnership meetings from 1991 to 2006. Mr Dixon, a solicitor, was very aware of the need to maintain control and management of the partnership outside the UK. Mr Higgins was rather perplexed at the rules that Mr Dixon laid down, but bowed to Mr Dixon's professional knowledge in these matters. While in the UK, Mr Higgins did not discuss with Mr Dixon or make any decisions and would travel back to the Isle of Man, when he requested, for meetings to discuss major decisions and to sign contracts.

ITTIOA 2005 s 858(1)(a)(i) applies to partnerships resident outside the UK in addition to those whose trade is controlled and managed outside the UK. The meaning of residence in this provision has yet to be judicially construed, but it would seem unlikely to add much to the analysis.

The above is an extract from 'Booth & Schwarz: Residence, Domicile and UK Taxation' by Jonathan Schwarz, and is published with the kind permission of Bloomsbury Professional.