Jennifer Adams considers the proposals contained in the consultation document 'Partnership Taxation: proposals to clarify tax treatment'. The consultation ran from 1 August to 1 November 2016 but only introduced basic proposals. A further consultation document giving more detail will be issued at a later date.
Although this current consultation document does not contain such controversial proposals as the MTD condocs, nevertheless all members with partnership clients (whether in trading or property partnerships) need to be aware of the intended changes to the taxation of partnerships not least because compliance could prove challenging for the 'nominated' partner charged with completing the partnership tax return.
The vast majority of partnerships will not be affected by the proposals as they comprise individual partners only. Problems are more likely to arise if companies and Limited Liability partnerships (LLP) are in the mix.
There is a similarity with the MTD consultation documents in that HMRC continues the theme of the proposals being introduced "in response to customers concerns". The words "remove uncertainty for taxpayers" and "preventing unnecessary costs" are used in the first section. The reality is that HMRC has lost tax as they have not always been able to trace the individuals liable to pay tax.
Proposal 1
HMRC proposes that for tax purposes only, a person is to be treated as a partner if their name is declared on the partnership return. HMRC asks the question as to whether this will be sufficient to ensure that the correct person is being taxed, particularly in the situation where the names on the Companies House register differ from those declared on the LLP tax return.
- Companies House and HMRC records being different.
HMRC relies on the information declared on the partnership return detailing the members' names, their UTR's and the allocation of profit to ascertain who is liable. Following the introduction of the PSC and the requirement for transparency, HMRC is finding that sometimes the names declared as PSC for LLPs do not match the declaration as per the partnership tax return.
The problem has arisen with particular reference to LLPs where the LLP itself may be a member of another partnership. The tax on the profit made by the first partnership will not be chargeable on the LLP itself, but ultimately on the individual partners of the LLP. These names will be shown as PSC but not declared on the first partnership's tax return. Proposals relating to partnerships that have companies as partners are considered under proposal 7.
Proposal 2
Building on proposal 1, HMRC proposes that those responsible for paying tax on any share of the partnership profit are treated as partners of the first partnership via a system of 'looking through'.
- 'Looking through' the partnership to the ultimate taxpayer
A number of partnerships rely on 'nominee' - type arrangements to enable partnerships without legal personality to hold interests in other partnerships. HMRC has come across instances where persons named as partners on the partnership tax return argue that they are not taxable as they are acting as a 'nominee' or 'agent' for someone else. It is HMRC's view that a partner cannot act in the capacity as 'nominee' or 'agent' for another.
To ensure certainty, the intention is to implement rules that will enable HMRC to ‘look through’ any partnership or LLP that is itself a partner of another to ascertain the 'ultimate partner'. The 'look through' would continue down the chain should the second partnership/LLP itself have partners who are partnerships/LLPs. The partners in the second partnership will be treated as partners of the first and so on, until the final beneficial owner (the ‘ultimate partner’) is identified.
In practice, such a 'looking through' approach will provide a challenge for the 'nominated partner' who is assigned the job of completing the tax return, as it will be their responsibility for getting the names, UTR and taxable profit split right. It will be particularly difficult where it is not clear how profits allocated by the first partnership/LLP will ultimately be allocated to the partners/members of the investing partnership/LLP (e.g. where that partnership/LLP makes discretionary profit allocations).
Proposal 3
As an aside this document is a lesson to all HMRC writers that their work should be proof read before publication - proposal 3 is missing.
Proposal 4
Proposal 4 is not a proposal as such, but asks for suggestions as to what should happen if the detail required from the previous proposals is not forthcoming. HMRC suggests that the partnership make payments on behalf of those partners whose details are not declared on the tax return. Meaning, of course, that the individual partners who can be traced will pay the bill for those who cannot.
Proposal 5
HMRC proposes that legislation be introduced confirming that the profit sharing arrangements (PSA) for tax purposes as set out in the partnership agreement to be the determining factor in identifying the partners’ profit shares.
- Determining the profit sharing arrangement
Although the PSA will follow the agreement, the intention is that this split can be overridden by the 'nominating partner' notifying HMRC of any change 'either by written or electronic format'. This proposal assumes that an agreement is in place, and although best legal practice many partnerships do not have one.
Proposal 6
HMRC proposes to legislate to confirm that the basis of allocation of the tax adjusted profit/loss between the partners be the same as the allocation of the profit/ loss as per the accounts.
- Allocation of tax adjusted profit
HMRC has challenged (and won) cases where determination of the taxable profit allocation has been made after the accounting period has ended (i.e. when the profit has been calculated), no doubt allocating profit to the lower taxpaying partner or to a particular type of partner.
The final paragraph under this section states "the current rules....may lead to inappropriate profit calculations for particular types of partner", but goes no further in explanation. This proposal will have an impact where, for example, a specific disallowable item, such as a private use of car, is allocated to a partner. In future any such an arrangement may need to be within the PSA.
Proposal 7
HMRC proposes that legislation be introduced to provide that profits of partners who are companies are taxed as though the company is a non resident company rather than as an individual which is the current situation.
- Non-chargeable persons (companies that are partners)
The current tax rules were written when it was more unusual for a company to be a partner and as such do not explain how to calculate partnership profits in such a situation.
HMRC already has secondary taxing rights on partnerships where non-resident partners have not paid income/corporation or capital gains taxes on their allocated profits; these proposals will extend these existing rights.
It is envisaged that should details of these ultimate company partners not be provided, the share of profit/ loss will be calculated as if the partner was a non - UK resident company. If the tax payment is not made then the partnership will be issued with a tax demand.
Conclusion
Whilst these proposals are unlikely to impact on most partnerships, it will be more administratively complex for those structures involving tiers of partnerships and those that have LLPs and/or companies as partners. Any partnership at the bottom of such a structure will need to know who its ultimate partners are and how its profits are shared between those ultimate partners.
Although the date for submission of responses to this particular consultation document has passed HMRC is willing to accept late submissions. AccountingWEB will be submitting a response to the final more detailed consultation document when published.
