Partnership taxation: overview of consultation document

Partnership taxation: overview of consultation document

On 9 August 2016, HMRC published a consultation document on proposals to clarify the tax treatment of partnerships. The consultation covers areas of partnership taxation that HMRC has identified as being potentially unclear or which produce an inappropriate outcome. HMRC state that they do not expect the consultation to have an effect on the vast majority of partnerships, and proposes to clarify the income tax and corporation tax rules for partnerships to ensure that they fit with modern commercial practice.

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The consultation is as a result of the Office of Tax Simplification (“OTS”) review of partnership taxation. The OTS published its final report in January 2015 which made some key recommendations regarding streamlining the administrative requirements for partnership, most of which HMRC rejected. The consultation document contains a number of proposals and questions regarding how partnership taxation could be improved to make calculating and reporting profits easier for partnerships.

It is split into seven key areas, which are described further below. The consultation applies to general and limited partnerships as well as foreign entities treated as partnerships for UK tax purposes and limited liability partnerships. While investment partnerships are specifically carved out of some of the areas, some of the proposals are potentially very onerous for investment partnerships being used in private equity or similar fund structures.

The key areas of consideration are outlined below.

Clarification of who is the partner chargeable to tax

The first proposal is that for tax purposes a person will be treated as a partner in a partnership if they are included in the partnership tax return. This is to remove any uncertainty over legal ownership compared to beneficial ownership. The partners listed on Companies House or in the partnership agreement may be the legal owners, who are not liable to tax on partnership profits.

This proposal could have an unintended impact where a nominee company holds the interest on behalf of a number of individuals, and the profit sharing arrangements at the nominee level may not be known by the underlying partnership. This would usually be the case for investment partnerships, rather than trading partnerships.

Business structures that include partnerships as partners

HMRC specifically exclude investment partnerships from the second proposal, which looks to introduce legislation to ensure that where there is a partnership (the first partnership) which has another partnership (the second partnership) as a partner, then the partners in the second partnership will need to be reported by the first partnership.

This could create some confidentiality issues (as the first partnership is not necessarily going to know the profit sharing arrangements in the second partnership) and will require extra information to ensure that the allocation of profits is reflected correctly. 

This would increase the amount of information required to complete partnership tax returns, and therefore could increase potential penalties for late or incorrect filing.

Where the second partnership is a UK partnership, or indeed a foreign partnership being allocated UK trading profits, then HMRC should already have this information from the second partnership’s tax return, albeit it has not been set out explicitly in one place.

Investment income – tax administration

The consultation document contains a specific section in relation to investment funds which are structured as partnerships.

HMRC acknowledges that investment partnerships often have unnecessary administrative requirements due to large numbers of non-UK partners or partners who are not taxable, and that the legislation should be changed to make the tax compliance for these partnerships easier.

There is no proposal in this section, instead HMRC are looking for suggestions on how the tax administration of partnerships with investment income could be improved.

Trading and property income – tax administration

This section applies to partnerships that carry on a trade or property business and recognises that while for investment partnerships there may be partners who do not have a UK tax liability, for trading and property partnerships typically all partners will have a UK tax liability.

It suggests that in situations where the partnership is unable to obtain details of all partners to include on the partnership tax return, then options should be considered to ensure that the right amount of tax is paid to HMRC. One of the options being put forward is that the partnership could make a tax payment to HMRC on behalf of any partners whose details are not included on the tax return.

Allocation and calculation of partnership profit

This section focuses on the allocation of taxable profits in partnerships. It proposes to legislate the following:

  • the profit sharing arrangements set out in the partnership agreement are the determining factor in identifying how to allocate the taxable profits;
  • tax adjusted profits should be allocated on the same basis as accounting profits;
  • profits allocated to companies subject to income tax (e.g. non-resident landlords) should be calculated as if the non-UK resident company is carrying on the business; and
  • if a partner is not subject to UK corporation tax or income tax (because they are themselves a partnership), if they do not provide details of their ultimate partners to the first partnership then their share of profit or loss would be calculated as if it is a UK resident individual.

Next steps

The consultation runs until 1 November 2016, so there is plenty of time for business’ views to be heard. KPMG are working on a response to the consultation. If you have any matters which you would like us to consider as part of our response, speak to your usual KPMG contact or Serena Bell - Senior Manager, KPMG in the UK who authored this article. 

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