The Office of Tax Simplification (OTS) has published a final report - the third on the subject - on the taxation of partnerships which lists 14 recommendations including clear and comprehensive guidance for new partnerships, allowing partners to claim their own expenses, simpler HMRC administration for international partnerships, and extending gift aid to partnerships.
The report states that several interim recommendations from its first report, published in January 2014, have been adopted by HMRC. However, it highlights two areas where the OTS believes HMRC should take more action.
One is the need for HMRC to establish a new role of head of partnerships to help ensure proper focus of tax policy and operational work.
On the new senior appointment, the OTS report states: 'We see it as ensuring there is proper focus on partnerships in tax policy matters and responding properly to the perhaps key finding of our first report: the significant proportion of UK business that is conducted through partnerships and the regular findings that legislation seems to deal with them as an afterthought, if at all.'
Secondly, OTS is calling for an industry/HMRC liaison group to be set up to provide a forum to address issues arising from new, specialist partnership uses, and describes HMRC’s initial suggestion of using the Working Together network for this purpose as ‘impractical’.
As well as better education and support for smaller partnerships and the ability for partners to claim allowable partnership expenses in their own self assessment returns, the OTS also wants HMRC to do more to tackle uncertainties around international tax issues and the question of double taxation for partnerships. It is also calling for an update on capital gains tax and HMRC’s Statement of Practice D12.
The OTS report pays particular attention to the issue of how partnerships can claim gift aid for charitable donations, saying that the current approach, whereby any donation must be allocated to the partners and claimed/treated as a donation by each individual with each person required to complete relevant forms, presents a considerable administrative burden and is in urgent need of simplification.
Instead, the OTS suggests two possible options. One is for the firm to make a donation, with the relevant gift aid declaration made by the representative partner. The donation would then be treated as made under gift aid by the individual partners with the charity entitled to reclaim the basic rate income tax.
Alternatively, the firm may simply take a deduction for the donation in its computation of trading profits. In this case it would be treated as a gross donation with no eligibility for the charity to reclaim basic rate tax, in parallel to the gift aid system for companies.
In addition, the report says that HMRC’s own guidance on gift aid and partnerships published on the charities section of the HMRC website needs to be amended to reflect the correct legal position, after HMRC indicated during the review that it does require a list of the partners’ names, their addresses and details of the shares of the donation. The guidance as published suggests that one partner may make a gift aid declaration on behalf of all the partners, provided he or she has the power to do so under the terms of the partnership agreement or some other instrument given under seal. HMRC has said it cannot trace the legal advice underpinning their current guidance, and wishes to check this with their solicitor’s office.
OTS tax director John Whiting said: ‘In some areas, particularly partners’ expenses but also with gift aid, we are aware that our recommendations are not accepted by HMRC. They feel we have put forward ideas that conflict with key partnership principles, in particular the difference between the partners and the partnership.
‘We have made our recommendations in line with our mandate to develop ideas for simplification, drawing in the evidence we have gathered of what is happening in practice and what would help partnerships. We do not believe there are any insurmountable problems here.’
The OTS has stated that this is its final report on partnership taxation but notes ‘it may be appropriate for the OTS to do short follow-up reports, probably in conjunction with HMRC, as our recommendations are progressed.’
The OTS Review of Partnerships: final report is available here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/396336/ots_partnerships_report_final.pdf
