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Sole Trader Or Partnership


Julie Butler - Expert Author

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6 January 2014

Many family businesses have “blurred” structures as many members of the family help and “lend a hand” with the tasks needed.

The question of whether an operation was a sole trade or a partnership was looked at in the case of G Christodoulou (TC2819). This can be important for all types of tax reliefs – from VAT status for the question of artificial separation or inheritance to see who is involved.


The taxpayer opened a hairdressing salon in 1998. Five years later he opened a restaurant. His wife was co-owner of the restaurant because this was a condition of the liquor licence, but the freehold of the premises was in his name only. She worked in the restaurant but received no money for this. The restaurant closed in 2011 because it was not financially viable.

Exceeding the VAT registration limit

HMRC said that the taxpayer was a sole trader in the hair salon and restaurant businesses. The salon’s turnover exceeded the VAT registration threshold from September 2001 and the taxpayer registered for VAT. HMRC said that sales from the restaurant should also be subject to VAT, despite the turnover not reaching the threshold, because it was one of the taxpayer’s businesses.

The taxpayer appealed saying that he and his wife ran the restaurant in partnership, and it was therefore a separate legal entity. As such there was no VAT liability on sales.

No payment for labour

The First-tier Tribunal was satisfied that the restaurant licence and liquor licence were in the names of the taxpayer and his wife. The judge noted also that the wife worked in the restaurant. The fact that she was not paid for her labour indicated that she was not an employee, but that she and her husband considered themselves to be running the business together.

Separate bank account

Factors in favour of the taxpayer being the sole proprietor of the business were that revenue from the restaurant were paid into the husband’s account and that he alone declared income from the business on his tax returns. However, this did not rule out the taxpayer and his wife working in partnership.

A separate business

After considering the evidence, the tribunal concluded that, on balance, the restaurant was run as a partnership.

This means that as separate businesses the partnership of the restaurant did not have to pay output VAT. Many would consider that the taxpayer did well to convince the tribunal that there was a separate legal entity for the restaurant. There was evidence pointing both ways so the conclusion had to be reached based on the balance of probabilities.

Liquor licence more important than bank

The fact that joint names were relevant to both the restaurant and liquor licences was considered to be more relevant than bank account information and self-assessment tax returns, which is surprising.

The tribunal allowed the appeal but made the comment that the balance of probability was ‘only just’ in favour of the taxpayer.

The key in such cases is fact, fact and more facts. All businesses must have clarity as to who does what and who controls the business.

About the Author

Supplied by Julie Butler F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH.  Tel: 01962 735544.  Email:  Website:

Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540, and Stanley: Taxation of Farmers and Landowners (LexisNexis).

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Article Published/Sorted/Amended on Scopulus 2014-06-11 09:10:29 in Tax Articles

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