Clarity for Partnership Taxation?
The Government have now released draft legislation to be included in the Finance Bill 2017 that will be released following the Budget on 22 November 2017.
This will affect those operating through partnerships, limited partnerships and limited liability partnerships and will have effect for accounting periods starting after the date of Royal Assent to the Finance Bill 2017.
It aims to ensure that the methods used to allocate profits, or losses, between partners is driven by commercial reality rather than tax expediency.
Each partner’s share of profit must be made on the same basis as the allocation of commercial profits between partners. The partner’s taxable profits will reflect the profit sharing ratio specified in the Partnership Agreement, failing which a partner’s share of taxable profits must be determined in accordance with the firm’s profit sharing arrangements in place during the relevant period. Retrospective variations to a partnership’s profit sharing arrangements will not be taken into account for tax purposes.
The methodology behind the allocation of profits should be accurately documented and applied consistently across all levels of partner. For the avoidance of doubt, and future potential disputes, we would recommend the drawing up of a comprehensive Partnership Agreement.
Many partners in receipt of a fixed share of profits are currently taxed on the fixed amount without bearing the burden of any tax on disallowable expenses. Under the draft legislation, fixed share partners would be required to bear a proportion of the tax-disallowable expenditure based on their overall percentage of the firm’s profit. This may be seen as a fair outcome, but not helpful in incentivising senior employees to take the next step into partnership.
Whilst the aim is for the taxable profit share returned on the Partnership Return to be conclusive for each partner’s tax purposes, there is proposed a disputes resolution mechanism via referral to the Tribunal.
The legislation clarifies that where a beneficiary of a bare trust is entitled absolutely to any income of that trust consisting of profits of a partnership, but they are not themselves partners, then they are subject to the same calculating and reporting of taxable profits as actual partners.
Where a partnership has a partner that is itself a partnership (tiered structure) the partnership must report to HMRC the details of that partner; and to provide both to HMRC the partner concerned, computations of the partnership’s taxable profits on all four potential bases that could apply (i.e. UK resident and non-UK resident individual, and UK resident and non-UK resident company). Where the partnership return shows the name of every ultimate recipient of the profits (or losses) of the second partnership, computations need only be prepared on the basis appropriate to those persons.
As a concession in the case of investment partnerships the Government accepts that where they have already reported under the OECD’s Common Reporting Standard (CRS) they will not need to duplicate this on their partnership return.
Further information will be provided following the Budget on 22 November 2017.
If you would like more information, or would like to discuss your tax affairs in general, please contact Steve Crompton on the details below:
Partner - Head of Tax
direct dial: 01942 292541
mobile: 07790 840394