The government has published draft legislation clarifying how the tax rules for partnerships operate.
These measures follow the Office of Tax Simplification (OTS) report on simplifying partnership taxation, published in January 2015, and the following consultation.
The draft legislation amends the partnership rules in both income and corporation tax Acts, as well as the tax administration rules so that the beneficiary of a nominee or bare trust arrangement, the trustee of which is a partner in a partnership, is itself treated as a partner in that partnership.
The legislation will take effect from 6 April 2018 for individuals and accounting periods beginning on or after 1 April 2018, for corporates.
The draft legislation also provides that the starting point for allocating the profits and losses of a partnership will be the profit allocation stated in the partnership return. This change will take effect for periods of account beginning on or after the date on which Finance Bill 2018 receives Royal Assent.
Other changes in the draft legislation, expected to take effect from 2018/19, include:
- Additional reporting requirements where the reporting partnership is a partner in another partnership or where the reporting partnership includes a partner which is itself a partnership.
- A requirement for a partnership that is a partner in another partnership to treat income and losses from that other partnership separately from amounts received from other sources.
- A requirement for a partnership that has a partner that is also a partnership to provide partner computations covering all four possible bases (that is, UK resident individual, non-UK resident individual, UK resident company and non-UK resident company) unless details for all the partners and indirect partners are included on the partnership statement and it is clear which basis of calculation is appropriate.
- A relaxation of reporting rules for partnerships that are reporting financial institutions as defined by the common reporting standard (CRS) and that report details of the partners under the CRS. These partnerships will not be required to provide details of the partners in the partnership return, provided that they only receive investment profits.
- A requirement that the amounts allocated to partners as profits and losses in a partnership return are considered final for tax purposes, and the introduction of a new mechanism for disputes over the reported allocations of partnership income and losses to be referred to the Tribunal.
The draft legislation requires that a partner’s percentage of taxable profits should be the same as his or her percentage of accounting profits. It remains to be seen how this will work in practice, given that most partners claim for personal expenses (typically motoring, but possibly also including course fees, insurances, professional subscriptions etc) which they incur personally. These are adjusted through the partnership tax return, and tax relief is claimed by the partner incurring the expense. This is equitable and avoids partners needing to be concerned about the personal choices of their business partners, such as which car to run, which professional organisations to subscribe to.