Notice to LLP to file partnership return invalid

The First-tier Tribunal has allowed an appeal against late filing penalties because HMRC’s notice under Taxes Management Act (TMA) 1970 section 12AA(2) to a limited liability partnership (LLP) to file a partnership tax return was invalid: MDL Property Consultants LLP v HMRC [2017] UKFTT 894. The tribunal considered that the deeming provisions which treat a trading LLP as a partnership for the purposes of the Income Tax Acts did not extend to modifying the meaning of the provisions in TMA 1970 referring to partnership returns.

Background

The appellant was the representative or nominated member of the LLP. In 2012, HMRC served a notice under TMA 1970 section 12AA requiring the appellant to file a partnership tax return for the tax year 2011-12. The tax return was not filed until 27 June 2013. In the meantime, HMRC issued penalty notices to both members of the LLP. The members appealed arguing that they had a reasonable excuse for the late filing.

Decision of the tribunal

Despite the fact that neither party had raised this issue, the tribunal decided that it was first necessary to look into the validity of the notices requiring the filing of a partnership tax return on the appellant as representative member of the LLP.

An LLP is a body corporate for tax purposes but under ITTOIA 2005 section 863(1) it is treated as a tax transparent partnership "for income tax purposes" if the LLP carries on a trade, profession or business with a view to profit. Pursuant to section 863(2), in these circumstances, provisions in the "Income Tax Acts" are modified (unless otherwise provided) so that references to partnerships and partners are read as LLPs and members of LLPs.

The tribunal held that while section 863(1) was effective to modify provisions of TMA 1970 (because section 863(1) applies for income tax purposes which included provisions of TMA 1970), section 863(2) could not modify section 12AA(2) because it only modifies provisions of the “Income Tax Acts”. The tribunal considered itself bound by (although it disagreed with) a decision of the Court of Session (Spring Salmon and Seafood Ltd, Re Petition for Judicial Review [2004] ScotCS 39) that TMA 1970 was separate and distinct from the Tax Acts, which includes the Income Tax Acts.

As a result, the tribunal concluded that, the LLP not being a partnership and the appellant and his son not being partners, the purported notice under section 12AA(2) to the partners to file a partnership return was not a valid notice to require the nominated member of an LLP to make and deliver a return under section 12AA. The reference in section 12AA(2) to "partners" could not be read as LLP.

Therefore, it could not be said that there was a failure to make a return under s 12AA by the due date as there was no due date. The notice was not valid. Accordingly, the tribunal decided that the penalties must be cancelled.

Comment

The tribunal considered that its decision should not “open the floodgates”, since HMRC “can obtain, with the sanction of penalties, returns under s.8 TMA from each member”. Nevertheless, it seems certain that HMRC will be concerned that it may not be able to compel LLPs to submit partnership returns. It may also be concerned about the possibility of similar challenges to other TMA provisions.

It will, therefore, be interesting to see whether HMRC seeks to appeal the decision and argue that the decision in Spring Salmon was incorrect or whether a change in legislation will be more appropriate.