Nature of dispute

Two brothers carried on in business in partnership. Their sister began High Court proceedings alleging she was also a partner. The court dismissed her claim.

The brothers claimed that legal fees incurred in defending the action should be allowed as a trading deduction.

HMRC refused the claim on the basis the fees were related to a partnership dispute. The department cited the decision in Connelly v Wilbey [1992] STC 783 as lending authority to their conclusion.

The First-tier Tribunal said the High Court proceedings were a failed claim by the sister whom the judge described as “an outsider” against the assets and profits of the business.

He said that the instance case could be distinguished from Connelly which had concerned a dispute between two partners. This matter on the other hand was not a partnership dispute because the sister was not a partner.

The...