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DFB 2018: Partnership taxation - proposals to clarify tax treatment

DFB 2018: Partnership taxation - proposals to ...

The draft clauses provide additional clarity over certain aspects of the taxation of partnerships.

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Draft legislation has been published which provides additional clarity over certain aspects of the taxation of partnerships. This follows the response to the August 2016 consultation which was published in March 2017. It addresses the following areas: how the current rules and reporting operate where a partnership has partners who are bare trustees for another person or where partnerships are partners; the allocation of partnership profits for tax purposes; the introduction of a new mechanism for the resolution of disputes between partners over the allocation of taxable partnership profits and losses; and a relaxation in the reporting of information for investment partnerships that report under the Common Reporting Standard (CRS) and who have partners who are not chargeable to tax in the UK.

Where the beneficiary of a bare trust is absolutely entitled to the income of a partnership but is not themselves a partner of that firm, from tax year 2018/19 onwards, they will be subject to the same rules for calculating profits etc. and reporting as actual partners. Partnerships may therefore need to consider further information about such partners - for example, if the beneficiary changes tax residence, the deemed cessation and commencement rules will apply.

For partnerships with partners who are themselves partnerships (participating partnerships), they will be required to calculate their share of income on all four possible bases of calculation (income tax, corporation tax, UK resident and non-UK resident) unless details of all the underlying partners are included on the partnership statement. This will apply to the tax year 2018/19 onwards.

Again, from 2018/19, where a partnership is a partner in one or more partnerships carrying on a trade, profession or business, the underlying trades are to be treated as separate notional trades. As a result of this, the results must be shown separately and will be subject to separate commencement and cessation rules.

In the case of investment partnerships which do not carry on a trade/profession or a UK property business, they will no longer be required to return the tax reference of a partner not chargeable to UK tax provided the partnership reports details of the partner to HM Revenue & Customs under the CRS. This applies to returns made after the legislation has been passed (expected to be spring 2018) and will relate to periods before or after the legislation is passed so is likely to apply to 2017/18 partnership tax returns. However, as non UK residents are chargeable to tax on UK source income this relief would only be available if the investment partnership has no such UK source income. Consequently this reduced reporting is likely to be limited.

The legislation clarifies how taxable profits must be allocated between the partners. For accounting periods beginning on or after the legislation is passed, the taxable profits must be allocated in the same ratio as the commercial profits of the partnership. The legislation refers to the ‘partner’s percentage’ of profits/losses and this includes any fixed proportion of their profit share. This could have a fundamental impact on professional partnerships who currently do not allocate a share of the tax disallowable expenses to their ‘fixed share’ partners. This change will also inhibit the streaming of particular types of income to different partners. The proposed change does not affect the capital gains allocation rules.

The partnership return will be determinative of the allocation of profits between partners. Where partners are in dispute over the correctness of the allocation of profits/losses shown on the partnership return, a new process will be introduced to refer this to a tribunal to be resolved. This only applies to the allocation shown on the return and not to the quantum of partnership profits. It will apply to 2018/19 partnership tax returns onwards.

For further information please contact:

Paul Harden

Roisin Byrne

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