HMRC have issued a consultation document regarding the tax treatment of partnerships as Trish Clements at Randall & Payne's Tewkesbury office explains.
For those who don't know, a consultation document looks to external parties for their input regarding the issues raised. There are two main areas of focus for the consultation:
1) Salaried members of LLPs:
HMRC's view is that there are inconsistencies in the use of LLPs and members can use this structure to benefit from the favourable tax rules in place for partners of an LLP when compared with the tax treatment of employees.
The consultation document seeks to ensure the reversal of any tax advantage where a partnership is created to secure this tax treatment. HMRC are seeking to ensure that salaried members are taxed as employees and are proposing to define salaried members as those who could be held to be an employee if their current terms were tantamount to an employment.
As discussed above, HMRC intend to class individuals as salaried members whose rights are equivalent to employment status, together with those who have no economic risk (loss of capital or repayment of drawings) in the event that the LLP makes a loss or is wound up; are not entitled to a share of the profits; and are not entitled to a share of any surplus assets on a winding-up.
2) Allocation of partnership and LLP profits and losses:
This area is looking to focus on 'partnership with mixed memberships'. In particular, where profits are allocated to members paying a lower rate of tax and subsequently allocated to other members at a more favourable rate. Also, where losses are relieved at a higher tax rate or earlier point than prior to the corporate partner. Many partnerships have undertaken tax planning of this type and are often seen as a 'corporate tax member', resulting in, what HMRC considers to be the best of both worlds.
The closing date for comments regarding the consultation is August 9, 2013. We would, therefore, hope to have a clearer picture of where HMRC will take this in the autumn.
If you would like to discuss this issue any further, please contact Trish Clements at Randall & Payne on 01684 295478.
