New tax threat to partnerships

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HMRC have issued a consultation to review two aspects of the partnership rules in order to remove the presumption of self-employment for some members of Limited Liability Partnerships (LLPs) that seek to disguise employment relationships and also to counter the manipulation of profit or loss allocations by some partnerships (not just LLPs) to achieve a tax advantage report Northampton accountants Harris & Co. HMRC are seeking responses on the design and potential impacts of the proposed changes from interested parties who are involved in a partnership and who may be affected by the proposed changes.

The proposals will affect limited liability partnership (LLP) members who work for LLPs on terms that are tantamount to employment (i.e. disguised employment). They will also have an impact on members of LLPs and other partnerships where the members of the partnership consist of members who are chargeable to income tax and others who are not, where it is reasonable to assume that: a main purpose of the partnership profit-sharing arrangements is either to secure an income tax advantage for any person or to allocate a partnership loss to a partner with a view to that partner obtaining a reduction in tax liability by way of income tax reliefs or capital gains relief. Profit and loss allocation schemes also cover tax-motivated arrangements whereby one partner transfers profits to another as a result of a revised allocation of profits in return for payment that is not taxed as income.

Issues covered in the consultation include: the definition of ‘salaried members’; whether there is an alternative to the proposed targeted anti-avoidance rule (TAAR) which would prevent attempts to sidestep the rules; how a TAAR could be expressed to ensure it is not inappropriately applied; HMRC’s proposed counteraction proposals to deter exploitation of the tax treatment of mixed membership partnerships as well as whether there are alternative approaches; and whether all schemes involving manipulation of partnership profit and loss allocations have been covered by the proposals or whether there are other schemes that need to be looked at.

Comments must reach HMRC by 9 August 2013.

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