Partnership taxation: clarifying tax treatment
Partnerships currently must follow certain rules on the taxation of profits and how they are distributed. On 13 September 2017, HMRC published draft legislation indicating changes to the partnership tax rules with the aim of clarifying tax treatment. The consultation closed on 25 October 2017 and we expect confirmation of the changes in due course.
The government want to remove uncertainty and provide greater transparency over the person ultimately entitled to the profits of a partnership. During the consultation for the proposed changes, HMRC were confident that the changes will have no major effect on the vast majority of partnerships. However, we have listed the main changes below:
Allocation of profit and losses
Partnership profits for tax purposes must be allocated between partners in the same ratio as the commercial profits. Previously, partnerships were able to allocate expenses and profits in a different way to the ratio of commercial profits. This will no longer be allowed.
Where a beneficiary of a bare trust has absolute entitlement to any income from that trust (including profits to a firm) but is not themselves a partner in the firm, then they are subject to the same rules for calculating profits and reporting as actual partners.
Partnerships as partners
A partnership that has partners that are themselves partnerships will be required to include the share of the partnerships income or loss calculated on all four possible bases of calculation for each of the participating partnerships. This applies:
- to UK resident and non UK resident companies as well as UK resident and non UK resident individuals
- unless the details for all partners and indirect partners are included in the partnership statement
Information on partnership returns
If a partnership is a partner in one or more partnerships that carry on a trade, profession or business, then the legislation will make clear that the profits and losses from each partnership must be shown separately. They must also be shown separately from any other income or losses on the partnership return.
Partnerships that don’t carry on a trade, profession or UK property business won’t be required to return the tax reference of a partner if:
- that partner is not chargeable to Income Tax or Corporation Tax in the UK and;
- the partnership reports details of the partner to HMRC under Common Reporting Standards.
What do you need to do?
Partnerships should become familiar with the new rules and consider if any of the above proposals will impact the partnership. They should adopt new systems and processes in order to provide additional information to HMRC if required.
We anticipate the main impact of the changes will be on Bare Trust arrangements, where additional administrative procedure will be required.
The changes should mean that some investment partnerships have less administrative burdens.
Timing of changes
The new rules relating to investment partnerships will apply to partnership tax returns filed after Royal Assent to the Finance Bill (22 November 2017). The new rules for allocation of partnership profit and losses will take effect for accounting periods beginning after the date of Royal Assent.
All other changes will come into effect from the start of the 2018/19 tax year.