HMRC recently published a summary of the responses to the consultation on its proposals to ‘clarify the tax treatment’ of partnerships (including LLPs). HMRC states that legislation will be included in the second Finance Bill 2017, and that the changes will apply to returns for accounting periods starting on or after 5 April 2018: draft Finance Bill clauses will be published for consultation in due course. In this article, we summarise the main proposed changes, to help clients and their advisers to consider whether they might be affected, and start thinking about any appropriate action.
The revised proposals
The good news is that the Government has accepted many of the representations made by the profession in respect of the original proposals. BDO has been actively involved in consultation with HMRC since the original proposals were announced and many of the points raised in our response have been taken on board. In particular, it is very welcome that it has now recognised the commercial realities of the way in which partnerships operate, the value of flexibility in the allocation of profit shares, and the administrative burden that the original proposals would have placed on partnerships and their advisers.
The proposals have been considerably modified, now the Government aims to:
- Clarify how to apply a firm’s profit sharing arrangement consistently in allocating taxable profits against the partners
- Legislate against retrospective variation of the arrangements
- Provide that the taxable profit allocations to joiners and leavers will be determined by reference to the profits arising to the partnership in the period when the relevant person was a partner.
Where profit allocations are disputed by partners, legislation will be introduced to protect the partners from being taxed on incorrect profit shares. Changes in profit sharing arrangements will not need to be notified to HMRC.
Partnerships with other partnerships as partners must report to HMRC the details of those partners, and provide to both HMRC and the partner computations of taxable profit on all four possible bases (UK-resident individual, non-UK resident individual, UK-resident company, non-UK resident company). Where the details of all the ultimate recipients of the second partnership profit have been provided to HMRC, the partnership will only have to prepare computations on the bases appropriate to those persons.
There will continue to be just one form of partnership return, which investment partnerships will still be expected to provide.
Investment partnerships reporting partner details under the Common Reporting Standard (CRS) will only need to include the identity and profit allocation of each partner where they receive only investment income.
The beneficiary of a nominee or bare trust arrangement will be treated as a taxable partner. Payments on account will not be required for undisclosed partners in trading/property partnerships. HMRC will instead use existing powers, including rejecting incomplete returns and issuing late filing penalties.
In addition, the proposal that the profits of company partners liable to income tax will be calculated as if a non-UK resident company were carrying on the business is to be implemented.
Implications and how to prepare for the changes
Partnerships with nominees or bare trustees as partners should review their current tax reporting practice and consider whether this will be affected by the proposed changes.
Partnerships that, for commercial reasons, determine profit allocations after the end of the period, have different sources of income and gains, and may have joiners or leavers to whom additional profits might be allocated, should examine their existing partnership agreements and consider whether changes may be required in light of the proposals in order to maintain flexibility over the profit sharing arrangements.
Partnerships with other partnerships as partners need to be aware that tax computations will need to be prepared for income tax and corporation tax on UK resident and non-UK resident bases, unless it can be confirmed that not all are applicable if the ultimate recipients of the profits or losses can be identified.
For help and advice on any partnership tax issue please contact Anna Jarrold, Colin Ives or Neil Williams.