GREATER RESPONSIBILITY for the administration of taxation of partnerships needs to be taken by HM Revenue & Customs, the Office of Tax Simplification has said.
The department should appoint a head of partnerships and establish a group working with industry to discuss and analyse partnership taxation, the OTS said in its third and final report on the matter.
Partnerships, which make up around 10% of UK businesses, are a business structure where two or more people share control and liability. Many larger partnerships including accountancy and law firms operate as LLPs – limited liability partnerships.
Last year, controversial taxation rules for LLPs came into effect, despite grave concerns of advisers. HMRC and the Treasury were concerned that the structures allowed “disguised employment” to take place, whereby people who are ostensibly partners in fact have a guaranteed income and little decision-making power. The worry for the government was the well-established arrangement gives rise to tax discrepancies, including paying less NI and income tax payments.
Under the plans, partners must satisfy one of three tests in order to maintain their status.
“Partnerships are a valuable business arrangement that are used for enterprise and deserve support and encouragement,” said OTS director John Whiting (pictured).
“Progress has been made since our previous report but there is undoubtedly more that can be done to make the tax system simpler and easier for these businesses.
As part of the report, the OTS recommended the introduction of “clear and comprehensive guidance for partnerships” when they register with HMRC.
It also recommended allowing partners to claim their allowable expenses incurred against their share of the profits; a range of improvements to help partnerships with international operations, including “a requirement for future double tax agreement renegotiations to always consider partnership issues”; clear guidance to be included in the partnership manual to address group relief on structures involving limited liability partnerships, which we understand HMRC has agreed to; the development of a “revised and updated” HMRC statement of practice D12 to govern partnership capital gains and address issues around entrepreneurs relief; the introduction two new alternative routes to gift aid for partnerships.
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