The taxation of partnerships is cobbled together from income tax principles designed for sole traders, and HMRC established practice. Unfortunately, HMRC can change its practice at short notice, and that is what has happened for the treatment of business expenses incurred by individual partners.
HMRC’s long standing practice was to treat business expenses incurred by partners, rather than by the partnership itself, as deductible in calculating the partnership’s taxable profit. As long as the expense was incurred wholly and exclusively for the purpose of the partnership business it was treated as tax deductible on the partnership tax return, even if the cost wasn’t included in the partnership accounts.
This not the same as a director who incurs a business expense on behalf of his company, as the director would be reimbursed by the company for that expense, and thus the cost would be part of the company accounts. This controversy is over partners’ expenses which are not reimbursed by the partnership, such as for travel or for use of the partner’s home office.
HMRC changed its guidance in its business income manual para BIM82080 to say the expense had to be included in the partnership accounts to be tax deductible. However, HMRC came under pressure over this change and has made an about turn.
The BIM guidance has now been altered again so it almost gives the same advice as before. Business expenses incurred by individual partners can be deducted in the partnership tax return, but not on the individual personal tax returns of the individual partners.