HMRC has published a response to the comments received on its consultation on partnership taxation. This consultation, which ran from August to November last year, suggested a number of proposed changes to provide clarity on areas where HMRC considered the current tax rules on partnerships to be unclear.
The focus of the consultation was on the compliance aspects of partnerships rather than substantive tax changes, with the intention of making it easier to calculate and report profits. However, in practice, these changes could still affect structuring and how partnerships are used, and partnerships will of course need to review their systems to ensure their returns remain compliant.
Following consideration of the responses to the consultation:
1. The government intends to legislate to ensure that the beneficiary of a nominee or bare trust arrangement is treated as a partner and they expect that person to be named on the partnership return (alongside the nominee), as they are potentially liable to tax on their allocation of the profits of the partnership.
This proposal ignores the practical and confidentiality concerns cited by respondents, noting that nominee arrangements are often for administrative convenience rather than any tax reason.
Moreover, nominees are sometimes used in order that the economic benefits of being a partner can be secured without falling within connected party rules operating in various contexts. Arguably it is correct to remove the possibility of using a nominee for this purpose, but it is nonetheless worth noting that those using a nominee will need to check whether the new rules cause them to become connected with any other persons or entities for tax purposes.
2. The profit allocation stated in the partnership tax return will be the first point of reference for HMRC in determining the taxable profits of each partner. There will be no requirement for partnerships to notify HMRC of changes in their profit-sharing arrangements.
In addition, to reduce the scope for allocating profits for purely tax-motivated purposes, partners will be treated as taxable on their share in profits or losses that arose during the period in which they were partners and any retrospective variation to a partnership's profit-sharing arrangements made after the period-end will not apply.
There does not seem to be any express suggestion that partnerships will otherwise be prevented from allocating profits in a tax-efficient manner where that is possible (e.g. by "cherry picking" what types of returns should be received by investors with different tax profiles) if this allocation is made at the outset. However, it is of course possible that further restrictions may be placed on profit allocations as these measures progress.
3. A number of the original proposals, notably those relating to structures involving "chains" of partnerships, have been dropped in recognition of the disproportionate administrative burden that it would have caused to require a profit generating partnership to report on its return the ultimate recipients of each part of its profit through a partnership chain. Instead, the partnership will be required to report to HMRC the details of its immediate partners and to provide to both HMRC and those partners computations of taxable profit on all four possible bases (UK-resident individual, non-UK resident individual, UK-resident company, non-UK resident company).
Although it is good that partnerships will not now need to identify beneficial partners standing at the top of a chain of partnerships, as well as the profit share ultimately allocated to them, preparing four computations nevertheless represents a significant increase in the compliance burden.
4. Partnerships which are reporting financial institutions and have provided details of partners under the OECD common reporting standard will not be required to report the same details on the partnership return if they only receive investment profits.
5. The government is not currently intending to require a payment on account in situations where there is a failure to comply with reporting requirements, as had initially been suggested, as the current process and penalties are considered to be a sufficient sanction.
6. Profits of firms which have a company partner chargeable to income tax will be calculated as if a non-UK resident company was carrying on the business.
The government intended to consult on draft legislation later this year with a view to changes applying to returns for accounting periods starting on or after 5 April 2018. While it is possible that the outcome of the General Election next month may disrupt this timing, the changes are not controversial politically and so we would expect these changes to go ahead broadly in this form.
