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It should be particularly noted that arrangements for
‘ junior partners’ will need to be structured
carefully to avoid falling foul of the rules.
The consultation document also indicates that any artificial
changes to partnership agreements to
try to avoid these new rules will be clamped down on.
2. Profit and Loss Allocation Schemes –
Government to attack hybrid
LLP/corporate partner arrangements:
The second proposal for consultation could have significant
effects on existing partnerships. It deals
particularly with the allocation profits and losses to different
members in order to reduce tax. In
most cases, these partnerships will involve ‘corporate’ (or
‘company’) members as well as
individuals. In these cases, corporate members are subject to
corporation tax, 23% of profits, whilst
individuals are subject to income tax which as the top rate is
45% of earnings. Clearly, by diverting
profits to corporate members, the overall tax burden is
significantly reduced.
HMRC believes that in scenarios as outlined above, a high
proportion of profits are allocated to
corporate members who, in reality, make little or no
contribution to the business and in many cases,
some or all of the individual partners will own the corporate
member and can therefore benefit from
the profits allocated to it.
In theory it could be argued that corporate members provide a
useful means for LLPs to warehouse
profits at a low tax rate, particularly where those profits need
to be reinvested in the business.
In reality, it is plain to see why HMRC might believe that the
structuring of an LLP, whereby nearly all
of the profits are taxed at the corporate rate, is simply
designed in order to secure a lower rate oftax. Moreover, it is
hard to see how it will be possible to convince HMRC that the
gaining of an
income tax advantage was not the main motivation for introducing
a corporate partner. HMRC give
the following examples which they say are not sufficient to
avoid a counteraction under these
provisions:
-
It is unfair to tax individuals on profits in a period during
which the individuals are unable to
access them or if the partnership uses the profits to develop
the business.
- Retaining working capital by means of these arrangements
effectively gives access to cheap
finance.
-
The member may be taking risks in respect of the profits since,
if the business fails, or theprofits do not vest, the amounts may
never in fact be received.
Importantly, the Government outlines that, if profit is made,
all of the profits allocated to LLP
members not subject to income tax (corporate members) will
simply be reallocated to those who are
subject to income tax.
It should also be noted that the Office of Tax Simplification
has been appointed by the government
to conduct a review into the taxation of partnerships. The
initial review will be carried out by
Autumn 2013 to identify the major complexities in partnership
tax and recommend priority areas for
a more detailed review.
8/16/2019 Tax Guide - Proposed Changes to the Tax Arrangements
of Llps and Partnerships
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Chester: 01244 323 051 | Liverpool: 0151 255
2300 | Manchester: 0161 817
6100 | Warrington: 01925 635
141 | Widnes: 0151 423 7500
| Visit: www.mitchellcharlesworth.co.uk | Follow Us
On Twitter @MitCharlesworth | Follow us on LinkedIn
When will these proposed changes take effect?
The consultation period closes on 9 August 2013. Draft
legislation will then be published in late 2013
at which time there will be further consultation. Legislation
will be introduced in the National
Insurance Contributions Bill 2013 and the Finance Bill 2014
which typically will receive Royal Assent
in June/July next year. The changes will take effect from 6
April 2014 although in reality we will not
have absolute certainty with regard to the new provisions until
the summer of next year. It is not
expected that the proposals will be substantially changed before
enactment as the consultation
merely invites views on the detailed legislative design and the
detail of implementing the changes.
For more information or to arrange a free consultation:
Should you require more detailed information about the proposed
changes outlined above or to
arrange a no obligation appointment, please contact LLP
specialist Tim Adcock, Tax Partner on
tel: 0151 255 2300 or 01244 323 051. Alternatively,
email: [email protected].
Visit our website: www.mitchellcharlesworth.co.uk
“Conference Table" by image courtesy of
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