Partnership taxation: proposals to clarify tax treatment

The Government has released revised proposals for the reform of partnership taxation to be brought into effect from April 2018.

Alongside publication of Finance Bill 2017 on 20 March 2017, HMRC also released a Summary of Reponses to its 2016 consultation on further reforms to partnership taxation.

Key points

The summary, which has been long awaited following the consultation’s conclusion on 01 November 2016, covers a range of issues relevant to partnerships and LLPs. The key points proposed are:

  • In response to adverse feedback on its original proposals, the Government will now accept that the beneficiary of a bare trust or nominee arrangement should be treated as the partner for relevant tax purposes, and will legislate on this basis. There will be no change to the treatment of trustees of settlements taxed under Part 9 Income Tax Act 2007.

  • Similarly, the Government has moved away from its original proposal to look through chains of partnerships when identifying the relevant partner subject to taxation. A number of concerns were expressed around administrative burdens this would cause, together with concerns over whether higher tier partnerships would be prepared to provide information to lower tier partnerships concerning the allocation of profits made at a higher level. Instead, the Government will legislate to require a partnership which has a partner that is itself a separate partnership entity to report to HMRC the details of that partner and to provide both to HMRC and the partner concerned computations of the partnership’s taxable profits on all four potential bases that could apply (ie UK-resident and non-UK resident individual, and UK resident and non-UK resident company). If HMRC has received details of all the ultimate recipients of the profits of the second partnership, computations need only be prepared on the basis appropriate to those persons. This will still involve compliance over and above that currently required, but is likely to be more acceptable to taxpayers.

  • Although there is an acceptance that investment partnerships may have differing requirements, the Government is not persuaded to create a separate administrative regime for such partnerships. The Government will continue to have one form of partnership tax return, and will expect investment partnerships, alongside trading and property partnerships, to complete such returns.

  • However, the Government does accept that in the case of partnerships that are reporting financial institutions under the OECD Common Reporting Standard and which have provided details of partners under CRS, it should not be necessary for the partnership also to provide full details of partners on the partnership tax return where only investment profits are received. Instead, only the identity of and profit allocation to partners reported under CRS will be required to be provided in the partnership tax return.

  • For trading and property partnerships, the Government does not propose to require payments on account where there has been a failure to report, but does expect all partnerships to be able to identify their partners (including to obtain Unique Taxpayer Reference numbers) and as a consequence, the current administrative and penalty regime for partnerships failing to comply with their obligations to submit partnership tax returns will be maintained.

  • As regards partnership profit sharing arrangements, the Government considers it reasonable for partnerships to be able to identify profit allocations, but now accepts that this should not be at the cost of flexibility. As a result, the profit allocation stated in the partnership tax return will be the first point of reference in determining a partner’s taxable profits. However, the Government does intend to legislate to protect partners from being taxed on incorrect profit shares, in particular where they are not, as a matter of fact, entitled to those profits as partner. There will also be no requirement for partnerships to notify HMRC of changes to profit sharing arrangements.

  • As regards the allocation of tax adjusted profits, the Government again now acknowledges the value of flexibility. The Government does, however, wish to reduce the scope for purely tax motivated allocations of profit, and will do so in the following ways:
    • to clarify how profit sharing arrangements will be applied consistently in the allocation of taxable profits, including in cases where partners are taxed on differing bases
    • to provide that retrospective (ie post period end) variations to a partnership’s profit sharing arrangements will not be taken into account for tax purposes
    • to deal with the situation of partners leaving or joining during an accounting period, with profits arising during the relevant part period used as a basis for assessment, taking account of profit sharing arrangements at the relevant time of joining.
  • For companies chargeable to income tax, the Government will legislate to provide that the partnership should calculate its profits as if a non-UK resident company was carrying on the business.

Comment

Overall, the proposals in the Summary of Responses are likely to be a great deal more palatable to affected taxpayers, although the proposals around allocation of tax adjusted profits still need to be fleshed out, and may still give rise to issues in practice. The Government proposes to legislate on these matters in the second Finance Bill 2017, with effect for accounting periods starting on or after 05 April 2018, so affected partnerships and partners should continue to monitor developments.

See our response to the original consultation here.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.