Partnerships: A review of two aspects
of the tax rules
Consultation open meeting 21 June 2013
Purpose
• Explain the problem & Government objectives
• Outline the consultation process
• Brief introduction to consultation proposals
• Gather views and suggestions to inform detailed design
Partnerships review consultation open meeting 21.6.13 | 29/07/2017 | 2
Agenda
Introduction
1.
2.
3.
4.
5.
Context
Government Objectives
Timeline & Consultation Process
The Consultation Proposals – Disguised Employment
Questions & Discussion
Break (Tea/Coffee)
6.
The Consultation Proposals – Profit & Loss Allocation Schemes
7.
Questions & Discussion
Partnerships review consultation open meeting 21.6.13 | 29/07/2017 | 3
What’s the problem?
Legitimate
commercial
structures
Regulatory
position
Commercial
flexibility
Inconsistency
& unfairness
Tax
avoidance
Partnerships review consultation open meeting 21.6.13 | 29/07/2017 | 4
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
Partnerships review consultation open meeting 21.6.13 | 29/07/2017 | 5
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
Partnerships review consultation open meeting 21.6.13 | 29/07/2017 | 6
Indicative Timeline 2013
Informal
consultation
Working on detailed policy and legislative design
Informal
consultation
Formal
consultation
Budget
Announcement
May –
August
SeptNICs Bill
Draft
Technical
Guidance
Oct –
Nov
FB14 Comment
period
Autumn
Statement
Draft
FB2014
legislation
Summary
of
responses
Partnerships review consultation open meeting 21.6.13 | 29/07/2017 | 7
Indicative Timeline 2014
Informal
consultation
Working on detailed guidance and implementation
Evaluation
March
Budget?
April
Effective
Date = 6
April 14
July
Implementation
Royal
Assent on
FA 2014
Final
Technical
Guidance
Partnerships review consultation open meeting 21.6.13 | 29/07/2017 | 8
Consultation Proposals
Partnerships review consultation open meeting 21.6.13 | 29/07/2017 | 9
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.
Partnerships review consultation open meeting 21.6.13 | 29/07/2017 | 10
Change Proposals
First Condition
Facts
Salaried
Member?
Any issue to
determine
contract of
service
Second
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
Partnerships review consultation open meeting 21.6.13 | 29/07/2017 | 11
Questions?
Coffee
Partnerships review consultation open meeting 21.6.13 | 29/07/2017 | 12
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.
Partnerships review consultation open meeting 21.6.13 | 29/07/2017 | 13
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
Partnerships review consultation open meeting 21.6.13 | 29/07/2017 | 14
extent as that in which the relevant profits
would have been.
Questions?
Partnerships review consultation open meeting 21.6.13 | 29/07/2017 | 15
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 review consultation open meeting 21.6.13 | 29/07/2017 | 16