Partnership taxation

Graham Chase, Tax Partner, CMS

 

The Government has confirmed that it will legislate in relation to the taxation treatment of partnerships. The proposed changes were originally published on 13th September and they mostly relate to administrative aspects.

However, the original proposals also included changes in relation to profit allocation rules. These changes are designed to address HMRC concerns that profits might be allocated amongst partners otherwise than on a commercial basis, so allowing tax to be avoided. At the time of the original publication HMRC provided an example of the mischief at which this provision was aimed. That example relates to a partner in a partnership who has losses from another business. In order to utilise such losses he asks the partnership to allocate to him an increased share of profits from a tax perspective. In these circumstances there is no commercial reallocation of profits. Some element of the tax savings (that thereby accrue to the other members) might be shared with the requesting partner.

Clearly, the example should be countered. The allocation is driven by factors extrinsic to the partnership, purely for tax purposes. Unfortunately, the original draft legislation was so widely drawn that it had the potential to operate in various unintended ways. What is needed is a rule that respects commercial allocations between partners in the context of their partnership business and its related activities. Tax overrides should only be relevant outside of these circumstances, perhaps subject to a tax avoidance motive test.

Comments to this effect which have been made to HMRC look to have been taken on board. The Budget overview states that the legislation has been revised to be more compatible with commercial arrangements for allocating shares of profit. No new draft legislation appears to have been published yet, so the detail is awaited. It is hoped that the revised rule will have been suitably restricted.

The changes are stated as due to have effect for the tax year 2018 to 2019. This implies, for example, that a partnership with a 30 April 2018 accounting period (which falls to be assessed in 2018/19) is already subject to the rules.

 

 

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