Partnerships and Tax

[chuno]

Hi all,

I am currently in the process of setting myself up as self employed. I currently work for a house builder as an Architectural Technologist and am going to provide a design service in my spare time for now.
I am already on the verge of reaching the 40% tax bracket with my day job, so have considered a partnership with my fiancee, or a limited company.
My fiancee can earn about another £16k before she starts to pay the higher rate of tax. Although she will not be participating in the architectural side of the Business she will deal with everything else - i.e. book keeping, tax returns, general administration.
If i were to set up a partnership between us, but assign, say 80% of the profit to her in the partnership agreement, will the IR get a bit sus that she is making more profit from the partnership even though i am spending more time within the business and i will be providing the professional service, not her?
Do they get involved in who should get assigned what within partnerships? Don't want to get done for tax evasion while i'm getting my business off the ground!

Any help would be much appreciated!

[Eric Mc]

The Revenue are aware that businesses sometimes endeavour to split the income or profits between the proprietors in an attempt to optimise tax liabilities in the proprietors' favour.

Up to a point they are powerless to stop this, especially when the share out of profits or the allocation of salaries or the allocation of dividends is comensurate with the involvement of the parties and their contributions to the business.

However, they can argue that a particular split is not warranted on the actual involvement of an individual and do have the power to disallow a profit sharing split (for a partnership) or a dividend payout (for a limited company).

However, making such an allegation stick can be quite difficult. I would refer you to the very recent case of Jones V' Garnett (commonly referred to as "The Arctic Systems" case).
Do a Google search under "Arctic Systems Ltd" and you will find lots of information about the facts behind this case and the latest update on its current position - there is a final House of Lords ruling expected in June or July this year.

[Jaglover]

As Eric said.

You could try a 50/50 split and see if you get away with it, which is entirely possible. But 80/20 in her favour when you are the main earner of the business is ludicrous.