Understanding VAT Rules for Partnerships

Registering a partnership for VAT can be complicated. Understanding the procedure will help you comply with HMRCs' VAT rules for partnerships.

VAT registration of a Partnership

A partnership must submit two forms to register for VAT. The VAT 1 form is the main application and should include either the trading name of the partnership or the names of the individual partners. One of the partners must sign this form. The VAT 2 form details all partners involved, and each partner must sign it. Alternatively, this information can be sent to HMRC in writing.

Key points to note:

VAT Treatment of Partnerships

A partnership is considered a single entity for VAT purposes. However, complexities arise when a partner is involved in multiple partnerships. A sole trader, for example, is a separate taxable person from a partnership they participate in. 

Similarly, different partnerships, even if they share some of the same partners, are treated as distinct entities. If a partner leaves, the VAT registration remains valid unless an entirely new partnership is formed.

This has the following impact:

VAT Rules for Partnerships with Changing Members

Once a partnership is registered, it does not need to deregister every time a partner joins or leaves. However, HMRC must be informed within 30 days of any changes. There is no requirement to submit a new VAT 2 form when a partner leaves; instead, notification can be provided in writing. 

Until HMRC is notified, the departing partner remains liable for VAT debts. When a new partner joins, they must provide their details via VAT 2 or an equivalent declaration.

Steps to manage partnership changes:

Partner Liabilities

All partners share joint liability for VAT obligations and debts. This means that HMRC can pursue the full VAT amount from any single partner. Even after leaving the partnership, ex-partners remain liable for any VAT debts incurred during their time in the business. 

Additionally, VAT assessments must be issued to all partners individually to ensure accountability.

VAT Rules for Limited Partnerships

Limited partnerships have specific VAT rules. Limited partners do not make taxable supplies, meaning only general partners are listed on VAT 2. A sole general partner must register as a sole trader or company. 

If the general partner is already VAT-registered, the partnership's VAT is accounted under that registration. In cases where the general partner is part of a VAT group, the partnership can also join that group.

Important considerations:

VAT Treatment of Limited Liability Partnerships (LLPs)

Limited Liability Partnerships (LLPs) are treated differently depending on their legal status. If incorporated, an LLP must register as a corporate body and can join a VAT group. If it is not incorporated, it follows the standard VAT registration process for partnerships. 

Unlike standard partnerships, LLP members do not need to complete a VAT 2 form since they function more like company directors.

VAT Rules for Scottish Partnerships

Scottish partnerships have unique VAT considerations. Unlike standard partnerships, the partnership itself is liable for VAT debts, and partners are only responsible if the partnership lacks sufficient funds. 

Additionally, where the same partners operate multiple businesses, each business can have a separate VAT registration, provided there is a distinct partnership agreement. Scottish Limited Partnerships register in their own name rather than in the names of individual partners.

Key distinctions include:

VAT Registration for Jointly Owned Property

When multiple individuals own property together, VAT obligations may arise. If taxable supplies are made, VAT registration might be required. In such cases, registration is generally done as a partnership or unincorporated association. 

If the co-owners are already part of a registered partnership, a separate VAT registration is usually unnecessary. HMRC may offer leniency if an incorrect tax approach has been taken, provided the correct amount of VAT was collected. However, VAT treatment for partnerships does not extend to other taxes.

VAT Groups and Partnerships

Recent changes in VAT grouping rules have broadened eligibility. Since 1 November 2019, individuals and partnerships that control VAT-registered entities can join a VAT group. To qualify, they must have a UK business establishment and be liable for VAT registration. 

Previously, VAT groups were limited to corporate bodies, but court rulings established that controlling partnerships and individuals should also be eligible to join VAT groups with the entities they control.

Key VAT Case for partnerships

In Ashtons Legal v HMRC [2022] TC08641, a partnership successfully reclaimed input VAT on property leases held by an associated company. Although the company was named on the leases due to legal constraints, the tribunal ruled that the partnership was the actual recipient of the supply.

HMRC accepted that the partnership suffered the VAT, rather than the company (whose name appeared on the leases) because the facts pointed to the economic and commercial reality of the situation.

Summary

Understanding VAT rules for partnerships is essential for compliance. Registering correctly and keeping HMRC informed prevents unexpected liabilities. Whether operating as a standard partnership, LLP, or limited partnership, following these VAT rules will ensure issues are avoided.

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