Among a flurry of consultations released this week, HMRC have published the consultation document announced at Budget 2016, the aim of which is to clarify how partners calculate their tax liabilities. The Government is aware that there are a number of areas in which the taxation of partnerships is not always certain, particularly considering the wide variety of modern partnerships. The consultation is intended to make calculating and reporting profits easier for partnerships. The consultation is relevant to general and limited partnerships, Limited Liability Partnerships (LLPs) carrying on business with a view to profit, and foreign entities classified as partnerships for UK tax purposes.
The consultation covers and sets out proposals for the following areas:
Clarification of who is the partner chargeable to tax
Uncertainty can arise where partners in a partnership or members of an LLP have contended that they are acting as a nominee or agent for someone else and therefore are not liable for tax. The Government proposes to change the rules to make it clear that, for tax purposes, a person will be treated, and presumably taxed, as a partner if they are listed as a partner in the partnership return.
Business structures that include partnerships as partners
Currently, it can be difficult to identify who should be paying the tax on a share of partnership profit where one or more of the partners are themselves LLPs or other entities transparent for tax purposes. The proposals (which exclude Investment Funds see below) would treat those responsible for paying the tax on a share of partnership profit as partners in the first partnership for income tax, capital gains tax and corporation tax purposes, with details of these partners reported by the nominated partner of the first partnership.
It is noted that this could increase the amount of potential penalties for late or incorrect filing.
Investment Funds structured as partnerships- tax administration
The Government is looking for suggestions on how to improve tax administration for partnerships with investment income only, as investment funds structured as partnerships can have many non-residents or non-taxable entities as partners, which may cause them an administrative burden.
Trading and property income - tax administration
Recognising that in rare circumstances the nominated partner of trading and property partnerships may be unable to establish the details of all the partners, the Government has suggested that payments could be made on account to HMRC on behalf of any unidentified partners.
Allocation and calculation of partnership profit
Proposals have been made to legislate the following:
Profit sharing arrangements
The profit sharing arrangements (PSA) as set out in the partnership or LLP agreement will be the determining factor in identifying the partners’ profit shares.
It will become vital that PSA are reviewed and kept up to date.
Allocation of tax adjusted profit to partners
The basis of allocation of tax adjusted profit between the partners should be the same as the allocation of the accounting profit or loss.
This could have implications for example where a specific disallowable, such as a private use of car, is allocated to a partner. In future this may need to be within the PSA (as above).
Companies chargeable to income tax
The profits of company partners liable to income tax will be calculated as if a non-UK resident company were carrying on the business.
For non-chargeable persons, it is proposed that the nominated partner in the partnership will need to provide details of the ultimate partners. If they do not, the share of profit or loss will be calculated as if the partner was a UK resident individual.
The closing date for comments is 1 November 2016.
These changes seek to improve the tax reporting for partnerships, so that the information provided can be more easily linked up to individual’s digital tax accounts.
Whilst these proposals are unlikely to impact most partnerships, it will be more administratively complex for those structures involving tiers of partnerships. Any partnership at the bottom of such a structure will need to know who its ultimate partners are and also how its profits are shared between those ultimate partners. This information may be difficult to determine for complex structures.
HMRC already have secondary taxing rights on partnerships where non-resident partners have not paid income/corporation or capital gains taxes on their allocated profits. These proposals will extend these existing rights.
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