HMRC consults on further changes to partnership taxation

15 August 2016

Read the key proposals set out in HMRC’s latest consultation on further changes to partnership taxation.

Following the announcement at Budget 2016, HM Revenue & Customs (HMRC) has launched a consultation on proposals to clarify the tax treatment of partnerships.

The consultation covers particular aspects of the partnership tax rules which, according to HMRC, “may be seen as unclear or produce an inappropriate outcome”. The objectives of the proposals are described as being “to remove uncertainty and prevent unnecessary costs for compliant taxpayers”, as well as “to reduce the scope for non-compliant customers to avoid or delay paying tax”.

The key areas are as follows:

•   Clarification of who is the partner chargeable to tax

•   Business structures that include partnerships as partners

•   Investment income – tax administration

•   Trading and property income – tax administration

•   Allocation and calculation of partnership profit.

The proposals will apply to general and limited partnerships, as well as to Limited Liability Partnerships (LLPs). They will also apply to foreign entities which are treated as partnerships for UK tax purposes. Although the majority of partnerships with simple structures will be unaffected, the rules could impact on those that are more complex, such as larger trading partnerships and investment partnership structures.

Partnership tax rules are widely misunderstood but most specialist partnership tax practitioners will agree with HMRC, as well as the Office of Tax Simplification (OTS), that the current rules give rise to a number of areas of uncertainty or ambiguity and attempts to address these are welcome. Similarly, certain administrative aspects have long caused problems for businesses, advisers and HMRC alike. In particular, the willingness to move away from a ‘one-size-fits-all’ approach and potentially introduce alternative return and filing requirements for investment partnerships with large numbers of investors is positive.

Inevitably, some of the proposals may affect genuine commercial arrangements. For example, the proposals for the allocation and calculation of partnership profit may restrict the ability of partnerships to operate a flexible profit sharing policy. However, HMRC has indicated that they are willing to listen to representations on practical difficulties that may be caused. Read more in the consultation document.

Next Steps

BDO will be actively engaging with HMRC on the detailed policy design during the consultation process, with a view to ensuring that the changes fit with commercial practice and our clients are not adversely affected by unintended consequences when the new rules come into force. Please contact a member of our Professional Services Tax team if you require further information or wish to discuss.