BIM38110 - Wholly & exclusively: partnerships: paying a partner a commercial rate for goods or services
Treat in the same way as any other trade expense
Rent paid at a commercial rate by a partnership to one of the partners for property used in the trade, profession or vocation is allowable to the extent of such use. Rent in excess of a commercial rate is not allowable. Where the rent appears to be excessive, you should ask the District Valuer to confirm the commercial rent. Rent below a commercial rent is allowable, but the Schedule A computation of the director may need to be adjusted because an uncommercial rent has been charged - see PIM2220.
In the case of Heastie v Veitch & Co [1933] 18TC305, a firm of accountants carried on their practice in premises owned by the senior partner. The partnership paid the senior partner a fair rent for their occupation. The Court of Appeal allowed a deduction for the rent. The court also allowed error or mistake claims for the earlier years when the partnership had omitted to claim a deduction. The main issue in the case concerned the question of whether the deduction should be of the rent actually paid or of the annual value of the premises under the then incarnation of Schedule A.
The Master of the Rolls, Lord Hanworth explained that the rent was deductible notwithstanding that it was paid to a partner. There was nothing to show that the rent was uncommercial, the property was used for the purpose of the firm’s profession and the fact that the recipient was a partner made no difference.
For those who do not have ready access to tax case volumes, the part of Lord Hanworth’s judgement on which the above guidance is based is set out below, 18TC page 317:
There is no doubt about it - and the Attorney-General does not contend otherwise - that, if these premises had belonged to some entirely independent owner, the partnership would have been entitled to pay that owner £1,250, and that sum would have been deductible as a proper outgoing in ascertaining the profits and gains, in accordance with the indication that is given in Rule 3 of the Rules applicable to Cases I and II of Schedule D, Sub-rule (c). There is no doubt about that. On the other side, there is no doubt about this, that, if and so far as capital is borrowed by the firm, borrowed from whomever you please, any annual interest or other annual payment in respect of that capital so borrowed and paid out of the profits and gains, is a deduction which definitely is forbidden in computing the annual profits and gains under the same Rule 3, Sub-rule (1). What is said here is this: it is said that, although in form it is a payment for rent and a proper payment for rent as it would be to a wholly outside person, this sum paid to the partner was really a payment made to him in respect of capital which he brought in, that he brought in a sum in the form of premises, but, none the less, it was a sum which may be treated as being converted into capital of £10,000, and, so far as he was paid £1,250, that was a deduction which was forbidden under Rule 3 (1). We have therefore really to come to the conclusion on which side of the line does this fall. Was it a payment for rent, or was it a payment for capital? The Commissioners said this: ‘Having considered the evidence and arguments adduced before us, we held that £1,250 was a fair and proper rent for 9, Coleman Street, and was a proper and admissible deduction in computing the profits of the Respondents.’
