Update on changes to the tax treatment of partnerships
The Government have now released revised legislation governing the tax treatment of certain partnership arrangements.
Summary of proposals
This legislation aims to provide clarity for partnership taxation. It addresses the basis period and reporting rules where bare trustees (or other partnerships) are partners in a partnership, a mechanism for the resolution of disputes between partners and a relaxation of the reporting requirements for investment partnerships.
Key changes from the draft legislation
Following consultation with professional firms and Institutes HMRC have decided to drop the proposed measure to directly link the allocation of taxable profits to commercial profits. This means that partnerships will not have to allocate disallowable expenses against fixed salary partners' share. This will be seen as good news for many partnerships as the additional administrative burden would have been considerable for some.
We welcome the fact that HMRC have listened to representations on this issue. However the original measure was proposed by HMRC counter-avoidance who clearly perceive a tax avoidance risk in this area. We predict that we will be seeing more targeted measures in the future and meanwhile more enquiries on partnerships with ‘fluid profit sharing ratios’.
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.
The remaining measures are:
1. Dispute Resolution
Whilst the aim is for the individual partner’s taxable profit share returned on the Partnership Return to be final and conclusive for each individual partner’s tax return purposes, there is proposed a disputes resolution mechanism via referral to a Tribunal.
2. 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.
3. 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.
4. 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.
These remaining measures will apply to the 2018/19 tax year apart from the case of investment partnerships, which do not carry on a UK trade/profession or UK property business, where the slightly reduced reporting requirements are likely to apply to the 2017/18 partnership tax returns.
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