PM133000 - Does a partnership exist?

In determining whether a partnership exists in any particular case, the starting point is the statutory definition under S1(1) Partnership Act 1890:

’Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.’

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, based on all the facts and evidence.

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. In that case, two companies purchased and sold cotton and shared profits. The agreement disclaimed that their relationship was one of partnership but it was nevertheless held to be one. In Fenston v Johnstone [1940] 23TC29 an agreement for joint purchase and development of land stated that it did not constitute a partnership but it was nevertheless held to be one.

A mere assertion that a partnership exists is not conclusive if there is no supporting evidence. In CIR v Williamson [1928] 14TC335 a father and sons worked a farm. There was no partnership deed, no evidence that profits were shared and the father conducted all financial arrangements. The court decided that there was not 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. A senior manager in an accountancy practice was given the status of partner within the firm and argued that he was a partner. The manager was paid as an employee though the salary was a share of profits. The intention of the firm was that he should not be a partner as this would be contrary to professional and statutory rules. The court decided that he was not a partner.

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.

A partnership whose income is above the VAT registration limits is required to register on Form VAT 2 with HMRC. 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 (in which a partnership deed was held not to have retrospective effect) and Alexander Bulloch & Co v CIR [1976] 51TC563 (where it was held that persons claimed to be partners who were minors were not partners - see PM132400).