Partners face 44% effective tax rate

A leading tax accountant has warned that the government’s ‘catch-up’ charge on partnership taxation amounted to a 10% increase in the top rate of tax for professionals.

Mark Lee, lead tax partner at BDO Stoy Hayward’s professional practices group, said professional partners greeted the Budget with relief when, as part of its transition from taxing partnerships on cash-based accounts to accruals-based ones, the government extended the catch-up period to ten years, instead of the originally proposed three.

‘All it does is spread the iniquity,’ said Lee. ‘I’m not arguing against moving from a cash basis, or about how work in progress is valued.

‘Once you’ve changed the basis, year-on-year the profits will be as they were before. But in changing the basis, the government introduced an additional profit that will be charged to tax for ten years, which effectively raises tax from 40% to 44%.’

Lee said there was little chance of changing the finance bill, but raised his concerns as a plea for some justification. ‘Historically, the Inland Revenue recognised the inequity of charging more than one year’s profits to tax,’ he said.

‘And here we have a clear example where this is happening deliberately.

‘My clients want to know why they have to pay tax at an effective rate of 44%,’ added Lee.

The catching-up charge will be identified in 1999/2000 and will be applied until 2008/2009. The charge will be capped in each year so as not to increase taxable income by more than 10%.

‘The catch-up provision results in bizarre consequences for new partners joining firms during the transitional period,’ added Lee. ‘Although the catch-up refers to profits which have nothing to do with them, they too will be taxable on up to 110% of their income each year through to 2008/2009.’

‘The allegation is a nonsense,’ said a Revenue spokeswoman. ‘The top rate will only be 47%. This is doing away with an anomaly.’

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