Partnerships targeted by HM Revenue and Customs

HM Revenue & Customs (HMRC) has recently published a consultation which is proposing to change how mixed partnerships are taxed.  New rules are intended to counteract certain tax avoidance schemes but genuine mixed partnerships may also be caught.

In recent years a number of partnerships have decided to include an additional partner, namely a company.  For some businesses such a structure has helped save tax.

The proposals intend to target those partnership structures which include one or more partners who do not pay income tax.  Such a partner is often a company which pays corporation tax; typically at lower rates than income tax.  The proposed rules will only take effect where it is reasonable to assume that the main, or one of the main purposes, is to save tax.

Under the proposals profits allocated to a corporate partner may instead be taxed on the individual partners where they also have an interest in that company.  Tax relief for losses allocated to an individual partner may also be denied.

Any new legislation is intended to take effect from 6 April 2014 but depending on the responses to the consultation, which are due by 9 August 2013, may change from the proposals outlined in the consultation.

HMRC are under increasing pressure to raise additional revenue and they have predicted that the above measures, including others announced in the consultation, are expected to raise in excess of £1 billon for the treasury over 4 years.

Whilst this consultation does not consider how profits are allocated between a normal partnership of individuals paying income tax only, there is concern that this might be next on HMRC’s agenda.

Should you require any further information please contact James Cornthwaite at the office.