New rules on partnership taxation

Following a period of consultation, and a first draft of legislation, HMRC have now published further draft legislation setting out changes to the way in which certain partnerships and LLPs are required to report their profits.

There had been a proposed change to the method of allocating partnership profits, which was thought to be the most important and wide reaching measure being considered. However, it's now been omitted from the current draft legislation. This is welcome news for many partnerships and LLPs that would otherwise have had to consider their arrangements.

However, there are changes to reporting requirements that partnership structures will need to review, but these are expected to be of less regular application.

Whilst HMRC believe there will be little impact for most partnerships, it will be important for partnership structures to review the rules and assess their likely impact.

Reporting requirements
There are a number of potential changes to partnership reporting requirements, and they are split into five areas:
  1. If a partnership interest is held on bare trust for a beneficiary, then the beneficiary should be treated as a partner for the purposes of the tax return and will need to be disclosed. The nominated partner, especially in investment partnerships, will need to ensure they have the information about beneficiaries to be able to prepare the tax return. This requirement will require the nominated partner to make further enquiries and could be onerous in certain circumstances.
  2. Changes are also proposed for tiers of partnerships, where an individual partner may invest in an underlying partnership through an intermediate partnership.  Unless the details for all the direct and indirect partners are included on the underlying partnership return, it will be necessary to include the calculation of the partnership profits in four possible ways, reflecting the results for UK and non UK individuals and companies, both UK and non-UK resident. This is aimed at ensuring all partners have the correct calculation of profits available to include in their own tax returns, reducing the likelihood of errors or mistakes.
  3. Clarification has been provided about the basis periods of indirect partners and the notional trade they carry on in an underlying partnership. This makes it clear that basis periods apply for all partners allocated trading results from a partnership, whether they invest directly or indirectly. This measure also deals with the timing of any cessation of trade.
  4. Currently, if a partner disagrees with his taxable allocation of profits, they are able to enter a different amount on their personal tax return. HMRC then often has to act as a 'broker' between the parties to establish the correct position. However, the legislation proposes that the partnership tax return will be now be a conclusive record of the partnership profits. The only recourse for a partner who disagrees with the reported profits is an appeals process via the Tax Tribunal.
  5. A welcome introduction is the relaxation of the rules requiring a Unique Taxpayer Reference (UTR) for each and every partner – which has historically been problematic for investment partnership with overseas investors. The new legislation confirms that a UTR will no longer be required for partners where the partnership is making a return under the Common Reporting Standard or under the Foreign Accounts Tax Compliance Act (FATCA). The partnership tax return will need to include a statement that the relevant provisions have been met with regards to making a return.
There are different introduction dates for the above measures. The relaxation of the rules for overseas partners in investment partnerships is expected to apply for returns made after the Finance Bill is enacted. The 2018/19 tax returns are likely to be the first affected. The remainder of the changes will take effect for tax years from 2018/19 onwards.

It will be important for all partnerships to review the draft legislation and its application. If you would like to discuss any of the proposals or how they apply to your partnership or LLP structure, please contact your usual Moore Stephens advisor.

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