Policy paper

Partnership taxation: proposals to clarify tax treatment

Published 13 September 2017

Who is likely to be affected

Partnership, limited partnerships and limited liability partnerships could be affected by one or more of the proposals.

General description of the measure

The measure provides additional clarity over aspects of the taxation of partnerships:

• how the current rules and reporting operate in particular circumstances where a partnership has partners who are bare trustees for another person or that are partnerships
• the allocation and calculation of partnership profit for tax purposes

As well as providing certainty needed by partnerships and their advisers, the new provisions ensure that partnership returns contain sufficient information to facilitate HM Revenue and Customs (HMRC) assurance work.

In addition the measure makes it clear that the allocation of partnership profits shown on the partnership return is the allocation that applies for tax purposes for the partners but provides a new, structured mechanism for the resolution of disputes between partners over the allocation of taxable partnership profits and losses shown on the partnership return.

Provides a relaxation in the information to be shown on the partnership return for investment partnerships that report under the Common Reporting Standard (CRS) and who have non-UK resident partners who are not chargeable to tax in the UK

Policy objective

While the rules governing the allocation of partnership profits for tax purposes and the return of those profits are clear in the majority of situations, their application in certain modern commercial arrangements is not always without doubt. The changes and clarifications comprised in this measure both seek to address areas of uncertainty and complexity identified as problematic by stakeholders but also limit the opportunity for partnerships to manipulate the allocation of taxable profits to obtain a tax advantage. The changes also facilitate digital transformation of partner taxation using information in the partnership return.

Background to the measure

The measure was announced at Budget 2016 and was subject to a consultation published in August 2016 entitled Partnership taxation: proposals to clarify tax treatment. At Autumn Statement 2016 the government announced a response document (published on 20 March 2017) and that draft legislation would be published.

Detailed proposal

Operative date

New rules for the allocation of partnership profits and losses will have effect for accounting periods and periods of account starting after the date of Royal Assent to the Finance Bill 2017.

Changes to give effect to the new return relaxation in respect of overseas partners in investment partnerships will have effect for returns made after the date of Royal Assent to Finance Bill 2017.

Other changes will have effect for 2018 to 2019 returns.

Current law

The current law is included within:

• Sections 12AA to 12ADA of Taxes Management Act 1970 (TMA) (partnership return)
• Part 9 of Income Tax Trading and Other Income Act 2005 (ITTOIA) and Part 17 of Corporation Tax Act 2009 (CTA) (calculating a partnership’s profits and losses and allocating them between partners)

Proposed revisions

Clarification of partnership rules and return requirements

Partners in nominee or bare trust arrangements

This change clarifies that where a beneficiary of a bare trust is entitled absolutely to any income of that bare trust consisting of profits of a firm, but is not themselves a partner in the firm then they are subject to the same rules for calculating profits etc and reporting as actual partners.

Partnerships with partnerships as partners

A partnership that has partners that are themselves partnerships (participating partnerships) will be required to include, for each of the participating partnerships, the share of the partnership’s income or loss calculated on all four possible bases of calculation unless details for all the partners and indirect partners are included on the partnership statement.

Investment partnerships

Partnerships that don’t carry on a trade or profession or a UK property business won’t be required to return the tax reference for 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 the CRS.

Partnerships that are partners in another partnership

If a partnership (the reporting 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 or losses from each partnership must be shown separately, and separately from any other income or losses, on the reporting partnership’s return.

Allocation and calculation of partnership profit for tax purposes

It will be made clear that partnership profits for tax purposes must be allocated between partners in the same ratio as the commercial profits.

Allocation of partnership profits determined by the partnership statement

It will be made clear that the allocation of partnership profits shown on the partnership return is the allocation that applies for tax purposes for the partners and introduces a new process to allow disputes over the correctness of the allocation of profit (or loss) for tax purposes to be referred to the tribunal to be resolved. Disputes over the quantum of partnership profits are not within the scope of the new process.

Summary of impacts

Exchequer impact (£m)

2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023
-	negligible	negligible	negligible	negligible	negligible

This measure is expected to have a negligible impact on the Exchequer.

Economic impact

This measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

The measure is not expected to impact on individuals, households or on family formation, stability or breakdown.

Equalities impacts

It is not expected that the measure will affect any of those groups that share protected characteristics.

Impact on business including civil society organisations

This measure is expected to have a negligible impact on the net administrative burdens for the affected population of partnerships. Some partnerships may experience an increase in burdens whereas others may see a reduction. However, the overall impact is negligible.

One-off costs for all affected partnerships are expected to be negligible. They include familiarisation with the new rules and may also include the introduction of new systems and processes in order to provide additional information to HMRC. On-going costs are expected to affect around 300 partnerships and include the following for partners in nominee or bare trust arrangements:

• additional information regarding name
• tax residence and
• reference number of such representative partners will be required in the partnership return

On-going costs for partnerships as partners, some partnerships may be required to calculate partnership profit on all 4 possible bases of calculation (for example UK resident individual, non-UK resident individual, UK resident company, non-UK resident company), and report these in the partnership return. However, this requirement is relaxed in cases where not all the calculations are relevant to the partnership.

On-going savings are expected to affect around 1,300 investment partnerships as there is no longer a requirement to provide a tax reference for partners who have no charge to tax or business activity in the UK and for which they report details of under the CRS.

Overall, the net ongoing impacts are expected to be negligible.

There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

The overall operational impact of this measure is expected to be negligible. There are expected to be fewer interventions as a result of clarifying various partnership rules and requiring partners to return the profit/loss allocation shown on the partnership return, which will generate operational savings. Developing an IT mechanism for partners to notify HMRC of disputes referred to the tribunal may cost up to £100,000.

Other impacts

Justice Impact Test: partners will be able to refer profit/loss allocation disputes to the tribunal. A full Justice Impact Test will be completed.

Other impacts have been considered and none have been identified.

Monitoring and evaluation

Monitoring will be achieved through analysis of tax return information and compliance activity.

Further advice

If you have any questions about this change, contact:

Rob Nott
Email: robert.nott@hmrc.gsi.gov.uk
Telephone: 03000 537413

Declaration

Mel Stride MP, Financial Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.