As announced at Budget 2016, the government plans to reform the rules on how partnerships calculate their tax liabilities. This consultation includes a number of areas where the taxation of partnerships could be seen as ‘uncertain in the context of the wide variety of modern partnerships’, in the view of the Exchequer and tax authorities, as well as over complicated and are deemed to be ‘unclear or produce an inappropriate outcome’.

Any rule changes will apply to general and limited partnerships, including foreign entities classified as partnerships for UK tax purposes. It also applies to limited liability partnerships (LLPs) carrying on a business with a view to profit, which are treated like partnerships for income and corporation tax purposes.

Partnerships are not taxed on their profits; instead individual partners are chargeable to income tax on their share of the partnership profits and to capital gains tax on their gains in respect of partnership assets. Corporate partners are chargeable to corporation tax on their share of profits and chargeable gains.

The key issues up for discussion include:

• clarification of who is the partner chargeable to tax;
• business structures that include partnerships as partners;
• investment income - tax administration;
• trading and property income - tax administration; and
• allocation and calculation of partnership profit.

The object of the proposals is to remove uncertainty by making the calculation and reporting of partnership profits clearer for taxpayers.

On allocation of tax adjusted profit to partners, the government is proposing new rules stating that the basis of the allocation of tax adjusted profit should be the same as the allocation of the accounting profit or loss between the partners. This rule change would apply to partnerships and LLPs.

So going forward, the government intends clarifying that ‘partners or members would only share in profits or losses for the period in which they were partners or members.

‘In some cases, the current rules do not explain how to calculate the profit of a partnership, or may lead to inappropriate profit calculations for particular types of partner’, states the HMRC consultation.

The review will also cover business structures that include partnerships as partners. The HMRC consulation document states: ‘The tax treatment of business structures which include other partnerships or LLPs as partners, such as those involving chains or tiers of partnerships, can be misinterpreted in some circumstances, as highlighted in the Office of Tax Simplification (OTS) Partnership Review.’

One of the proposals to deal with these structures would be to create a ‘look through’ approach to ultimately define the economic or beneficial owner of the profit share to curb any abuse of partnerships for tax purposes. Another proposal considers legislating to provide that those responsible for paying the tax on a share of partnership profit are treated as partners in the first partnership, and their details have to be reported by the nominated partner of the first partnership.

There is also a wide open question about the future taxation of investment funds set up as partnerships, with a broad request for possible improvements.

The closing date is 1 November 2016 at 11:45pm.

Email submissions should be sent to [email protected]

The Partnership taxation: proposals to clarify tax treatment consultation is available here