The Autumn Statement 2013 - Partnerships and the Manipulation of Profit and Loss Allocations

Partnerships & Targeting the Manipulation of Profit and Loss Allocations:

Before the Autumn Statement there was much anticipation surrounding how the government plans to introduce new measures to counter the perceived manipulation of profit and loss allocations within 'mixed membership' partnerships to avoid tax.

A ‘mixed partnership’ occurs when the partnership consists of both individual and non-individual (usually company) members. This clampdown is most likely to affect firms in the professional services sector, particularly law firms and accountancy firms.

Since its previous Budget estimate, the treasury has upped their estimate for tax take from stamping out partnership and LLP avoidance by £1.9bn - to £3.3bn.

Rather unsurprisingly, very little mention was given to this policy in the Chancellor’s headline speech.

While there is a little bit more information in the documents that accompany the statement, and draft legislation has been published, those affected by the changes will be disappointed by a lack of detail, particularly regarding the status of salaried members of an LLP. This is important because there has been a suggestion that salaried partners could be considered as employed - rather than self-employed – and therefore be subject to different tax liabilities.

The first measure outlined by the government will target arrangements whereby partnership profits are allocated to a non-individual member of the partnership (rather than an individual member) in order to benefit from lower tax rates (usually corporation tax) that the non-individual member is subject to.

Under the government’s proposals, these transferred profits will be re-allocated back to the individual partner for tax purposes, thereby being subject to income tax.

The Autumn Statement documents outline various conditions that must be met before the new rules apply. The anti-avoidance measures will only be applied when:

- the non-individual's profit share is deemed to be 'excessive', and

- an individual member may ultimately benefit from the reallocated profits.

These anti-avoidance measures came into immediate effect on Thursday 5th December 2013 in order to protect against risks to tax revenue.

The second element will affect cases where partnership losses are allocated to an individual partner, instead of a non-individual partner, to enable the individual to access certain loss reliefs, again in order to achieve an overall tax advantage. These measures, will apply from 6 April 2014.

Partnerships who are affected by these measures will be hoping for a little more guidance from HMRC before 6 April 2014, in order to have time to assess their status and make adjustments if they are needed.

For more information regarding these changes to Partnerships, please contact our expert tax team or complete a quick enquiry form and we will contact you.

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