Whilst some changes are intended to clarify the operation of the current rules for partnerships, several are also intended to increase transparency and make it easier for HM Revenue & Customs (HMRC) (and potentially also for taxpayers) to track the flow of profits and losses through partnerships.
This will be vital to making the government’s Making Tax Digital (MTD) programme work in the partnership context. The ultimate aim – once the delayed digital reporting for business is introduced – is for partners to see their share of partnership profits and losses pulled automatically from the partnership return to their own personal tax accounts, rather than having to include them in a self-assessment return. This can only be a success where there is clear and robust traceability between the ultimately taxable partner and the underlying partnership (or partnerships), and these new rules form part of the groundwork for that traceability.
From April 2018, legislation will confirm that the beneficiary of any nominee or bare trust arrangement is to be treated as a partner for tax purposes. This will generally not make any difference to the tax position, as the beneficiary of a nominee agreement should already be treated as entitled to their share of partnership income and expenses. However, there are administrative implications for the partnership as such beneficiaries will now need to be disclosed as partners on the partnership return rather than the nominee.
There is an exclusion from this requirement where the beneficiary of a nominee arrangement is not subject to UK tax on their profit share. This exclusion will be relevant, for example, where the beneficiary is a tax-exempt pension fund or where (in the case of an investment partnership) the beneficiary is non-resident.
Allocation of partnership profits
Partners will be required to bring the share of income and expenses allocated to them in the partnership return into their own self-assessment unchanged. Recent case law had suggested that partners were able to correct this allocation where they believed that it was not accurate: this change will prevent such correction going forward. There will be a dispute mechanism where a partner believes that they have been wrongly allocated profits, but this will not extend to disputes on the correct tax treatment of any amounts. In future, the only remedy for disagreements of this nature will be for the partnership itself to correct its self-assessment. It may not, however, always be straightforward for partners – particularly in larger partnerships or where the partners are leaving the partnership – to obtain this remedy.
A further significant change in this area – which would have required tax profits to be shared on the same basis as accounts profits – has been dropped since the previous draft legislation was released. This will retain valuable flexibility, for example for mixed partnerships where management expenses can be allocated to corporate rather than individual partners.
Two changes are specifically aimed at tiered partnership structures (that is, where one partnership (A) is a partner in another partnership (B)). This is common in, for example, private equity or ‘fund of funds’ structures. The diagram below gives one example.
The first change is aimed at ensuring that the ultimate taxable entities at the top of a tiered partnership structure are given the correct information to accurately report their profit share from the lower tiers. The lower tier partnership (B) will now be required to identify the ultimate investors, and provide calculations on the relevant tax basis for each. If it cannot identify the ultimate investors, it will need to submit calculations on all four possible bases (UK resident individual, non-UK resident individual, UK resident company, non-UK resident company). In practice, the underlying partnerships may well not hold, or be entitled to acquire, the relevant information on ultimate investors, particularly where there are more than two tiers to the partnership structure. In these cases, providing multiple calculations will increase the time and cost of tax compliance.
The second change affecting tiered partnerships is aimed at the higher tier partnership (A). These partnerships will now be required to treat their share of profits and losses from an underlying partnership (B) as a separate trade or business for tax purposes. Should A be a partner in more than one underlying partnership (or carry on a trade or business in its own right), this will mean it is treated as having multiple trades for tax purposes. This is already HMRC’s view of how the current rules should operate, and the new legislation is intended to put the matter beyond doubt. However, some partnerships may have previously filed tax returns on the basis that a single trade exists, which can be beneficial where some partnerships in the structure are loss-making.
Investment partnerships: easing the administrative burden?
Last year’s consultation asked for suggestions on how the administrative burden on investment partnerships could be reduced, recognising that the current system was designed with trading partnerships in mind, and is often not a good fit for investment partnerships with primarily overseas or non-taxable investors.
Disappointingly, this has been translated into a single measure that will offer only limited relief. Investment partnerships will no longer need to provide a unique tax reference (UTR) for overseas partners where the following conditions are met:
- The partner is not chargeable to either UK income or corporation tax on their share of partnership income and expenses;
- The partnership itself does not carry on a trade (or profession or UK property business); and
- The partnership is required to make a report under the Common Reporting Standard (CRS) in respect of that partner.
If all of the above conditions are met, the partnership must include a statement in its partnership return confirming that it has made (or will make) a report under the CRS. For investment partnership structures not required to make a report under the CRS, the administrative burden is actually likely to increase as a result of the additional information required under the tiered partnership rules (see above).
The new rules for investment partnerships will take effect from Royal Assent to the Finance Bill, with the remaining changes taking effect from April 2018.
All partnerships should use the period before the new rules take effect to consider whether they will have an impact and, if so, what changes need to be made. In many cases it will mean that additional information has to be obtained from partners.
If you have any questions on these specific partnership rules, or on the taxation of your partnership more generally, please get in touch with your usual Saffery Champness partner.