Tax: Revenue's paper chase: Shared liability and a cascade of assessments put a strain on partnerships

IN 1990 the Inland Revenue arrived in the 20th century by ceasing to treat a married woman as a mere chattel of her husband. Now that the marital partnership has been split asunder by the Chancellor, perhaps he will pause to consider the Revenue's treatment of other forms of partnership.

Under the present rules a business partnership is treated as an indivisible singular blob by the Revenue. For example, if Mr and Mrs Glum are trading as a business partnership, the Revenue's computer disgorges three schedules every year (or many, many more as we shall see in a moment).

One is sent to Mr Glum. Another is issued to Mrs Glum. But the main assessment is sent to - and the whole of the partnership tax bill is demanded from - the Glum Partnership.

The Revenue's view is that the tax on each partner's share of the profit is all payable by the partnership. And if one partner cannot or will not pay due tax, his colleague is legally compelled to pay it.

The principle of joint liability for partnership debts is valid when applied to trading expenditure, but income tax is not trading expenditure. Income tax is a personal tax, assessed according to each individual's circumstances. If one partner is entitled to only a few tax allowances, his tax bill will be high. If his partner has many allowances (say, married with oodles of personal pension premiums), his tax bill will be much lower. Clearly there is neither logic nor moral justification for the Revenue to demand all the tax from one partner.

However, this arrangement suits the Revenue nicely, thank you very much. But it is unquestionably wholly unjust and overdue for change. Common sense and fairness demand that each partner should be liable only for his own tax bill.

Clearly the Revenue will not find this proposition attractive. But the loss of access to other people's bank accounts for someone else's tax can be offset by some hefty savings by the Inland Revenue.

I mentioned earlier that three pieces of paper flutter forth from the Revenue each time a two-person partnership is assessed. A larger partnership causes a proportionately larger quantity of paper to spew out of the Revenue.

But these wallpaper samples do not emerge just once each year because, in practice, there are often amendments to be made.

For example, if one partner marries, pays a new pension premium, or receives income from a source outside the partnership, then a new set of assessments is issued. If a partner leaves, or a new partner joins, or profit-sharing ratios are altered, or losses arise, the whole lot goes back into the melting-pot and a wodge of revised assessments is issued by the Revenue. Inevitably, with so many alterations, there are errors, which leads to more exchanges.

Grip the arms of your chair firmly because there is even more confusion to come.

We'll go back to Mr and Mrs Glum. Three pieces of paper are issued to them. One shows the tax payable by the partnership (relating to the business profit) and has the appropriate payslip attached.

The assessment issued to Mr Glum shows his share of that tax and also shows the Enterprise Allowance he received. His assessment has a payslip for the tax relating only to the Enterprise Allowance.

Mrs Glum's assessment also shows her share of the partnership tax, her Enterprise Allowance and a small income from letting a flat. Her payslip is for the Enterprise Allowance and the letting income.

If you persevered through the last three paragraphs you may have glimpsed a thread of logic, but it is so tenuous that there is no possibility of most people understanding it. To the average taxpayer, all that paper seems like a confusing welter of tax demands for different amounts of money.

However, all that has gone before is child's play. Mr and Mrs Glum (who are considering changing their name to Mr and Mrs Despondent) have one little partnership business covered by one tax district and another partnership based in another tax district. This causes the cogs of the Revenue to seize completely. The present systems simply cannot cope.

So where do we stand?

The Revenue has the advantage of being able to pursue any partner for all the partnership tax. But it has the massive disadvantage of a cumbersome dinosaur of a 'system' for assessing people in partnership that is manifestly inefficient, incomprehensible to the taxpayer, and unjust.

What needs to be done?

The Revenue should assess all 'partnership' income tax on individuals. When a partnership's annual accounts are lodged and agreed, the Revenue should then allocate the respective proportions of profit to each individual.

Each person will then receive an assessment showing all his income: share of profit from partnership A, share from partnership B, Enterprise Allowance, letting income, and so on.

Taken in conjunction with the anticipated move towards simpler 'actual' assessment for self-employed people - instead of the present ludicrous previous-year, except-when-the-moon-is-full basis - assessments could be simpler, less often subject to correction, and, dare I say it, understood by the taxpayer.

Norman Braidwood is a chartered accountant.