Tax changes ahead for partnerships?

HMRC are considering changes to the tax rules for partnerships. Changes arising will be included in legislation that will be effective from 6 April 2014.

HMRC’s formal consultation closed 9 August 2013 and consideration is now being applied to the following issues:

  • Disguising employment relationships through Limited Liability Partnerships, and
  • Certain arrangements involving allocation of profits and losses among partnership members.

In their review notes setting up the consultation HMRC offered the following explanation as to who is likely to be affected by the proposed changes:

 Disguised employment:

 An LLP member who works for the LLP on terms that are tantamount to employment.

 Profit and loss allocation schemes:

 Members of LLPs and other partnerships where the members of the partnership consist of members who are chargeable to income tax and others who are not, but only where it is reasonable to assume that:

  • a main purpose of the partnership profit-sharing arrangements is to secure an income tax advantage for any person; or
  • a main purpose of arrangements in force is to allocate a partnership loss to a partner with a view to that partner obtaining a reduction in tax liability by way of income tax reliefs or capital gains relief.

 Profit and loss allocation schemes also cover tax-motivated arrangements whereby one partner transfers profits to another as a result of a revised allocation of profits in return for payment that is not taxed as income.

These changes will likely require a fresh look at partnership taxation planning when the draft legislation is published later this year.

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