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BIM72005 - Partnerships - general notes: Existence of partnership

In determining whether a partnership exists in any particular case, the starting point is the statutory definition. It is important that you establish all of the facts to determine the true relationship between the parties. This will include finding out what the intentions of the parties were. No single factor is likely to be conclusive on its own. You will need to form an overall view.

A declaration that a deed is to create a partnership relation, or is not to do so, is not conclusive on its own, though it may cast some light on the parties' intentions see - Morden Rigg & Co and R B Eskrigge & Co v Monks, [1923] 8TC450 - (Two companies purchased and sold cotton and shared profits. Agreement disclaimed that their relationship was one of partnership. Nevertheless held to be one) and Fenston v Johnstone, [1940] 23TC29 (Agreement for joint purchase and development of land stated it did not constitute a partnership. Nevertheless held to be one).

A mere assertion that a partnership exists is not conclusive if there is no supporting evidence (CIR v Williamson [1928] 14TC335 (Father and sons worked a farm. There was no partnership deed, no evidence profits were shared and father conducted all financial arrangements. Held not to be a partnership). The fact that the parties did not intend to create the relationship of partnership is a factor to be taken into account in deciding whether a partnership exists but again is not conclusive -see Horner v Hasted [1995] 67TC439 (Senior manager in an accountancy practice given status of partner within the firm argued that he was a partner. Paid as an employee though salary was share of profits. Intention of firm was that he should not be a partner as this would be contrary to professional and statutory rules. Held not to be a partner).

Section 2(3), Partnership Act 1890 provides that the receipt of a share of net profits is prima facie but not conclusive evidence of partnership. An agreement to share net losses in the sense of being obliged to make good those losses is an even stronger indication.

Provided that the loan agreement is in writing and signed by the parties concerned the advance of a loan to a business on terms that the rate of interest is to vary according to the profits does not of itself make the lender a partner in the business (Section 2(3)(d), Partnership Act 1890). A contract for remuneration varying according to the profits does not of itself make the servant or agent a partner in the business (Section 2(3)(b), Partnership Act 1890). As regards salaried partners you should refer to BIM72025.

A partnership whose income is above the VAT registration limits is required to register on Form VAT 2 with Customs and Excise. If a partnership fails to register that of itself does not mean that there is no partnership but it is a factor to be taken into account in deciding whether a partnership exists.

For a review of other factors which might be evidence of partnership, and earlier cases, see Saywell and others (trading as Eaton Tractor Co) v Pope [1979] 53TC40 (Agricultural repair business. Partnership deed held not to have retrospective effect) and Alexander Bulloch & Co v CIR [1976] 51TC563 (Wine and spirits business where it was held that persons claimed to be partners who were minors were not partners - see BIM72065).