Can one partnership be a member of another partnership?
HMRC guidance (at PM120100) says no, in England, Wales or Northern Ireland (but yes, in Scotland). Notwithstanding that, HMRC guidance (at PM145120) also explains the manner in which tax returns are to be made where one partnership is a member of another. The explanation for this apparent contradiction lies in the fact that it is considered (to quote a leading authority on the law of partnerships) that ‘where a firm purports to become a partner, this will, as a matter of law, constitute each of the members of that firm as a partner in his own right…’
The recent Court of Appeal decision in BCM Cayman LP and another v HMRC [2023] EWCA Civ 1179 qualifies that proposition and also makes at least one other point clear.
The unequivocal clarification is in relation to LLPs: only legal persons can become a member. That excludes the possibility of a general partnership or a limited partnership as a member. But one UK LLP can be a member of another.
The qualification relates particularly to partners subsequently joining, and possibly to limited partnerships (‘LPs’).
The General Partner (‘GP’) of a Cayman LP had signed the partnership deed of a UK LP on behalf of Cayman LP, purporting to make Cayman LP a member of UK LP. Subsequently, a new member had joined Cayman LP. Was that new member to be treated as a member of UK LP?
The Court of Appeal observed that partnership arises from an agreement between the partners to carry on business together. There was no evidence of any such agreement between members of UK LP and the new member; so it followed that the new member was not a member of UK LP.
But were the limited partners who were already members of Cayman LP constituted members of UK LP by Cayman LP’s purported membership of it? It wasn’t relevant to the decision, but the First-tier Tribunal had decided that they were not and the Court of Appeal didn’t express disagreement. It drew a distinction between general partnerships and LPs, whose limited partners are prohibited from taking any part in the business of the LP. So, to put it at its lowest, it is no longer axiomatic that when a limited partnership purports to become a partner in another firm, this will, as a matter of law, constitute each of the members of that firm as a partner in his own right.
Finally, it’s worth emphasising HMRC’s submission in the case: ‘partnership is the relationship between persons carrying on a business in common with a view to profit. Whether a person is admitted as a partner depends on that relationship and on what the parties decide. It is not a question of legal principle but of mixed fact and law depending on the circumstances of the case.’
For more information on partnership tax implications, please get in touch with your usual BKL contact or use our enquiry form.
