partnerships: a review of two aspects of the tax rules

Partnerships: A review of two aspects of the tax rules

Consultation open meeting 21 June 2013

Partnerships review consultation open meeting 21.6.13 | 21/04/23 | 2

Purpose

• Explain the problem & Government objectives

• Outline the consultation process

• Brief introduction to consultation proposals

• Gather views and suggestions to inform detailed design


Agenda

Introduction

1. Context 2. Government Objectives 3. Timeline & Consultation Process4. The Consultation Proposals – Disguised Employment 5. Questions & Discussion

Break (Tea/Coffee)

6. The Consultation Proposals – Profit & Loss Allocation Schemes

7. Questions & Discussion


What’s the problem?

Commercial flexibility

Inconsistency& unfairness

Regulatory position

Legitimate commercial structures

Taxavoidance


Government Objectives

• Restoring level playing field

• Prevent unfairness and market distortion • Stopping partnerships – not just Limited Liability Partnerships -

from being used in ways that can give rise to certain tax advantages


Consultation – general approach

• A starting point for making the changes, not an end point.

• Certain fixed parameters, but we don’t have all the answers

• If you have a better idea, let’s hear it


Indicative Timeline 2013

Draft FB2014

legislation

Informal consultation

Working on detailed policy and legislative design

Formal consultation

Budget Announcement

Sept- NICs Bill

Autumn Statement

Summary of

responses

FB14 Comment period

May – August

Oct – Nov

Draft Technical Guidance



Indicative Timeline 2014

Effective Date = 6 April 14


Working on detailed guidance and implementation

March July Implementation

Royal Assent on FA 2014

April

Budget?

Evaluation

Final Technical Guidance


Consultation Proposals


Part 1 – Disguised Employment

Current tax rules

Limited Liability Partnership (LLP) members are taxed as if they are partners in a partnership established under Partnership Act 1890 (traditional partnership) even if they are engaged on terms closer to those of employees.

Problem

• In the absence of the LLP Act 2000, the LLP would be taxed as a company. Under the LLP Act, individual members are taxed as self-employed partners and company members are liable to corporation tax.

• Avoidance: low paid workers taken on as LLP members giving rise to loss of employment benefits and protection.

• Unintended unfairness: high paid workers benefit from self-employed status leading to loss of employment taxes payable.


Change Proposals

First Condition

Is the LLP member a salaried member by reference to normal tests as set out in the Employment Status Manual published on the HMRC website?

Second Condition

• No (significant) economic risk

• Not entitled to a share of profits; and

• Not entitled to a share of any surplus assets on a winding up

Facts

Salaried Member?

Any issue to determine contract of

service

Second Condition


Questions?

Coffee Coffee


Part 2 – Profit & Loss Allocation Schemes

Current tax rules

• Under partnership law, it is not necessary for profit sharing ratios to be in proportion to contributions, effort or capital, to be the same from year to year, or for profits and losses to be shared in the same proportions.

• This flexibility is available for all partnerships not just LLPs.

Problem

• Tax advantages arise from increasing use of this flexibility.

• Mixed member partnerships: profits and losses

• Different tax attributes.


Profit & Loss Allocation Schemes: Change Proposals

(A) Mixed member partnerships Proposals cover working capital and profit deferral arrangements – but we are open to ideas of how to address the issues of profits never received (for example, consultation question 10), regulatory constraints etc without giving rise to tax avoidance or creating excessive administrative burden.

Profit Condition •Examine the economic connection between the members not charged to income tax and those within the charge.•Apply the ‘main purpose’ test to determine if the charge to income tax should be allocated back to the member within the charge.

Loss Condition Stop income tax or capital gains relief subject to the main purpose text.

(B) Different tax attributes Apply the correct tax treatment by treating the payment received as the income of the ‘transferor’ member or connected person, chargeable in the same way and to the same extent as that in which the relevant profits would have been.


Questions?


Thank you

Please send further enquiries and comments to

By email:

[email protected]

By post:

Partnerships Review Consultation

c/o Tax Administration Policy Team, HM Revenue & Customs,

1C/06, First Floor, 100 Parliament Street, SW1A 2BQ

partnerships: a review of two aspects of the tax rules

Documents

consultation general

llp act

partnership act

loss of employment benefits

company members

employment status manual

limited liability partnerships

indicative timeline