Reform of partnership taxation

15 September 2017

One year on since HMRC launched its consultation on proposed reforms to partnership taxation, the eagerly awaited draft legislation has now been published. Sensibly, several of the original proposals have been dropped and the remaining proposals have been significantly amended.

BDO has been actively engaged with HMRC throughout the consultation process and we welcome most of the changes to the original proposals. We will continue to liaise with HMRC to help ensure the final legislation fits with commercial practices carried on by our many partnership clients.

Further down you will find our analysis of the implications of the changes and how partnerships should prepare for the changes.

A brief summary of new rules for partnership taxation

Legislation will be introduced to:

  • Put it beyond doubt that, where a partnership has a partner acting in the capacity of a bare trustee (normally on behalf of other partners), the beneficiaries are to be treated as the partners for tax purposes.
  • Ensure that the allocation of profit as adjusted for tax purposes between partners is in the same ratio as the allocation of accounting profit between them.
  • Clarify the rules and introduce new reporting requirements for partnerships with partners that are partnerships.
  • Relax the reporting requirements for investment partnerships with overseas partners not liable to UK tax which are subject to Common Reporting Standard requirements.
  • Confirm that the allocation of partnership profit shown on the partnership return applies for tax purposes for all of the partners and implement a new process for resolving partner disputes on the allocation through application to the tribunal.

Implications of reforms to partnership tax and how to prepare for the changes

Nominee and bare trustee partner arrangements
Now that HMRC has confirmed that the beneficiaries of nominee and bare trustee partner arrangements will be treated as the partners for tax purposes, partnerships using such arrangements should review their current tax reporting practice and consider whether changes will be appropriate.

Allocation of profit and loss
The new rules determining how tax adjusted profits or losses must be allocated between partners are likely to affect many partnerships. Practices in which certain disallowable items of expenditure are specifically allocated to particular partners will no longer be permitted, even if undertaken in the interests of equity and fairness.

Partnerships should review their current practices in preparation for these changes. Partnerships with complex profit sharing arrangements, for example, with different income streams allocated in varying proportions to the partners will also need to consider how they will be affected by the new rules.

Partnerships as partners
Partnerships with other partnerships as partners should be prepared to submit income tax and corporation tax computations on both UK resident and non-UK resident bases.  Alternatively, partnerships can consider collating and disclosing details of all their indirect partners in order to alleviate the need to submit a tax computation on a basis that is not relevant to any of those partners.

Investment partnerships with non-UK resident partners
Investment partnerships with non-UK resident partners should review their compliance procedures in respect of Common Reporting Standard (CRS) requirements. Where the partnership will be reporting details of non-UK investors under CRS, the partnership will no longer need to include Unique Taxpayer Reference (UTR) numbers for these persons on its partnership tax return, bringing some relief to the administrative burden on businesses in this sector.

The new Tribunal process for resolving partner disputes over the amount of taxable profit share allocated to them by the partnership is welcome. As ever, however, partnerships should seek to avoid disputes arising through clear and carefully constructed agreements and ensuring the tax position is fully understood and agreed between the partners, particularly on retirements.

Timing of changes

The relaxation in respect of non-UK resident partners of investment partnerships will apply to partnership tax returns filed after Royal Assent to the Finance Bill, including in respect of periods ended prior to that date. The new rules for the allocation of partnership profit and losses will take effect for accounting periods beginning after the date of Royal Assent. All other changes will come into force from commencement of the 2018-19 tax year.

If you would like advice or guidance on how to manage to impact of the changes announced in the Winter Draft Finance Bill 2017 to 2018 please get in touch.

Read more on the Draft Finance Bill