New tax changes on way for partnerships?

Partnerships, including those in the legal sector, could be in line for further reforms of the tax rules.

Last year saw significant changes to the taxation of partnerships, including new rules to tackle so-called disguised employment in limited liability partnerships (LLPs). HM Revenue & Customs (HMRC) was also given the power to reallocate profits in mixed partnerships – partnerships, including LLPs, involving at least one person and at least one non-individual, usually a company – to a individual taxpayer where it considers too much profit has been allocated to a non-individual.

In January, the Office for Tax Simplification (OTS) published its final report and recommendations in its review of partnerships taxation, which said that that as a structure that accounts for around ten per cent of businesses in the UK, partnerships deserve “support and encouragement” from tax and general business policymakers.

The report also highlighted areas where clear differences of opinion remain between the OTS and HM Revenue & Customs (HMRC).

For example, HMRC opposes an OTS recommendation that partners be able to claim business expenses on their personal tax returns, on the basis that this would increase complexity. The OTS rejects that view, saying it contradicts evidence it has gathered and that it will continue to test the recommendation during its future work around partnerships.

Elsewhere, there are more positive signs, including HMRC agreeing to issue an updated Statement of Practice D12 on capital gains tax, to revise its guidance to clarify when partnerships are eligible for entrepreneurs’ relief on CGT and to further discuss with the OTS its proposal that the law on gift aid be changed to allow partnerships to claim relief.

According to the most recent Solicitors Regulation Authority figures, partnerships and LLPs make up more than a third (38 per cent) of firms in England and Wales.

With the OTS saying it may be appropriate to issue short follow-up reports as its recommendations move forward, and the tax environment for partnerships likely to continue to evolve over the coming months, expert advice will be more important than ever. Moore Thompson can provide comprehensive advice on all aspects of partnership and other tax issues – for more information, please contact us.