Article:

Reform of partnership taxation

06 December 2017

Following the publication of draft legislation on partnership tax reforms in September 2017, updated legislation has now been published in Finance Bill 2017-18.

The latest draft of the rules has abandoned a controversial change to the way partnership profit allocations are taxed, along with several of the Government’s original proposals. The rules now look significantly different to those set out in the original consultation document in 2016. BDO has been actively engaged in discussions with HMRC throughout this process and it is gratifying that it has listened to representations made and taken a practical approach to the new rules.

 

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.
  • 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 (CRS) or Foreign Account Tax Compliance Act (FATCA) 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 First-tier Tax Tribunal.

The proposed change to the rules determining how tax adjusted profits or losses must be allocated between partners will not now take place. This is a welcome development and means that partnerships can continue to allocate certain disallowable items of expenditure to particular partners where appropriate, and that partnerships with complex profit sharing arrangements (for example, covering different income streams) will not have to re-write them. 
 

Implications of reforms 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.

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 CRS and FATCA requirements. Where the partnership will be reporting details of non-UK investors under CRS or FATCA, it 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. 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 Finance Bill 2017-18 please get in touch.

Read more on the Draft Finance Bill 2017-18