Fengate Developments (A Partnership) v Customs and Excise

A transfer of land by a partnership may constitute a taxable supply to its partners or to a third party. The court must determine the legal effect of the transaction as a whole, rather than treating the transfer as merely an assignment of one partner’s beneficial interest. A partner has no separate entitlement to a specific partnership asset while the partnership continues. A transfer which removes an asset from the partnership and enables the partnership to raise funds for its business may therefore be a supply by the partnership. This remains so where the transfer documentation purports to record only a sale of one partner’s interest.

Fengate Developments, a property-development partnership registered for VAT, appealed from the Value Added Tax and Duties Tribunal’s decision of 8 September 2003 dismissing its appeal against a VAT assessment of £37,234 plus interest.

The dispute concerned the transfer of approximately 2.5 acres of partnership land. The transfer stated that £125,000 was paid for Mrs Darlow’s interest, although the land was worth £250,000 and the transaction enabled the partnership to reduce its overdraft. The central issue was whether the transfer constituted a taxable supply by Fengate of the whole interest in the land.

1. Appeal dismissed. The Tribunal’s conclusion was upheld, although the court reached it by a different route.
2. Under the Partnership Act 1890, partnership property must be applied exclusively for partnership purposes. While the partnership continues, a partner has no separate right to a specific partnership asset. The partner’s interest is a beneficial interest in the partnership assets as a whole and is ordinarily realised through partnership income, retirement or dissolution.
3. Mrs Darlow could have assigned an interest in her partnership share to Mrs Brawn. That would not, however, have transferred a specific interest in the Red Land during the continuance of the Fengate partnership.
4. The transfer instead removed the Red Land from the Fengate partnership and vested it in Mr Darlow and Mrs Brawn as tenants in common. The inconsistent wording of the transfer had to be construed so that the land was first transferred out of the partnership and Mrs Brawn then acquired a half interest for £125,000.
5. The transaction enabled Fengate to raise £250,000 to reduce its overdraft and was in furtherance of Fengate’s business. It therefore constituted a supply of land by Fengate to Mr and Mrs Darlow for disposition consistently with the transfer, including the disposition of a half interest to Mrs Brawn.
6. The court noted that a partnership may make a supply to one of its partners or to a third party, applying the relevant provisions of the Value Added Tax Act 1994. The supply was not exempt because the partnership had waived exemption in respect of the land.

• High Court (Chancery Division): Appeal from the Value Added Tax and Duties Tribunal dismissed on 6 February 2004.
• Value Added Tax and Duties Tribunal: Appeal against the VAT assessment dismissed on 8 September 2003.