Enquiries into Professional Partnerships

HMRC are undertaking more full Tax Enquiries into the Tax Returns of professional partnerships: in particular into the accounts of Solicitors, Barristers, Doctors, Dentists, Chartered Surveyors, Patent Agents, Architects - and even Accountants! They have set up a few "centres of excellence" where Fully Trained Inspectors of Taxes will lead multi-disciplinary teams (including Schedule E compliance officers, VAT specialists and HMRC accountants and computer interrogation analysts).

Tax Inspectors are particularly interested in the valuation of Work in Progress. They are looking to reconcile the time recording system of the practice with the eventual bills raised (tracking any variations in the write off time charged during the billing process), and in the valuation of unbilled balances, where no invoice has yet been raised. UITF 40 is of particular interest to HMRC at the moment as they anticipate that the new rules regarding recognition of income will particularly affect professional partnerships. The Treasury has anticipated an extra £15bn from this issue alone in 2009/10 and compliance inspectors are expected to be vigilant in trying to obtain the maximum adjustments; bringing forward significant tax bills. Such adjustments can be particularly problematic for large partnerships, as often the HMRC proposed adjustment will be asked for at least two years after that year’s profit has been distributed. We have had several cases where we have successfully defended clients from large taxable increases in this area.

Whilst most Tax Enquiries into professional partnerships are so-called "technical" or "aspect" enquires, they can be in the same format as full Tax Investigations into close companies. These will usually include requests for access to all accounting systems, all business bank records and into the personal drawings and expenses of the partners. In full Tax Enquiries a reconciliation is usually sought of each partners’ capital account, including details of how partnership loans are financed. Each partner receives a S9A TMA notice. Requests to see the private bank accounts of individual partners may be made as part of the Tax Inspectors’ review of the partners’ drawings, but are usually only pressed if the taxman finds a problem in the records or systems of the partnership.

Particular problems have arisen regarding to the employment status of retired partners who have maintain an ongoing consultancy arrangement with the practice. Tax Inspectors appear to be taking a harder line on the nature of the relationship and are also challenging whether the payments are revenue in nature (and therefore tax deductible) or are part of a deferred Capital payment on exiting the partnership.

Other areas where HMRC seem to be concentrating are payments to spouses and also management service companies. In the latter HMRC are seeking to disallow some payments as not being made for wholly business purposes or in the largest cases are using the UK-UK Transfer Pricing legislation.

As HMRC increases its specialisation in dealing with professional partnerships so those businesses and their advisers may need the assistance of Tax Enquiry specialist negotiators in defending their position; especially as the ensuing tax demands can easily run into very significant figures.

Lynam Tax has experience in helping a number of large professional partnerships in dealing with Tax Enquiries by HMRC’s specialist teams. If your business or one of your client’s has a problem with HMRC call us now for a free initial, no obligation discussion.

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