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Partnership taxation: proposals to clarify tax treatment

17th August 2016

HM Revenue & Customs have issued a consultation document setting out proposals (and asking for responses) to deal with the limited number of situations where the normal rules regarding partnership taxation are causing uncertainty or can result in an incorrect outcome or the information available is unclear.

The issues and proposals are:

  1. Sometimes the partner named on the partnership return is a nominee or different to Companies House records. 

    HMRC will treat as a taxable partner in a partnership whoever is named as a partner in the partnership tax return.
  2. Whilst accepting that partnerships are “transparent” for tax purposes, the Government believes, particularly in view of digital reporting, that taxpayers using a “structure” involving partnerships need certainty as to their tax treatment. 

    The Government is therefore to legislate so that those ultimately responsible for paying tax on a share of partnership profits are treated as partners in the first partnership for the purposes of income tax, capital gains tax and corporation tax.
  3. The Government wishes to ensure the correct tax is collected where the details of partners entitled to partnership profits are not provided by the nominated.

    One proposal is for a payment to be made to HMRC on account on behalf of any unidentified partners.  
  4. There is potential for uncertainty where partners dispute the allocation of profits made to them for tax purposes. 

    The Government considers that legislation should confirm that the allocation of profits set out in the partnership agreement is the determining factor. 

    This can however be overridden by notification to HMRC by the nominated partner.
  5. There is sometimes manipulation of profits, losses and capital gains allocations to obtain a tax advantage.

    The proposal is to legislate so that the basis of allocation of tax adjusted profit reflects the allocation of the accounting profit or loss between the partners. 
  6. The profits of company partners liable to income tax are calculated as if the company was an individual. 

    Legislation would be introduced so that the profits of company partners liable to income tax will be calculated as if a non-UK resident company were carrying on the business. 
  7. There are no special provisions for investment funds structured as partnerships.  This can cause administration problems because of the number of investors involved.

    There is no proposal, rather a request for suggestions as to how the tax administration could be improved.

If you have any questions please do not hesitate in contacting Mark Pattenden, Private Client Tax Director, via email or on 020 7969 5590, or your usual haysmacintyre contact.