Finance Act 2018, which received Royal Assent on 15 March 2018, enacts several changes affecting the taxation of partnerships, most of which apply for the 2018-19 tax year onwards. The changes will be relevant to general and limited partnerships, Limited Liability Partnerships (LLPs) carrying on business with a view to profit, and foreign entities classified as partnerships for UK tax purposes.
Although HMRC believe there will be little impact for most partnerships, it will be important for partnership structures to review the rules and assess their likely impact.
The legislation is clarified to ensure that the beneficiary of a nominee or bare trust arrangement will be treated as a partner. HMRC will expect that person to be named on the partnership return, as they are potentially liable to tax on their allocation of the profits of the partnership.
Where a beneficiary of a bare trust is absolutely entitled to any income of that trust consisting of profits of a firm, but is not a partner in the firm, they will be subject to the same rules for calculating profits and reporting, etc. as actual partners.
Under the current rules, a partnership is obliged to provide HMRC with details of all of its immediate partners and the allocation of profit or loss to those partners, on a partnership return. To ensure that under this approach the correct taxable income can be established for any ultimate beneficiary taxable in the UK, the rules are being amended such that there will be a requirement to include, for each of the ‘participating’ partnerships, the share of the partnership’s profit or loss calculated on all four possible bases of calculation (UK-resident individual, non-UK resident individual, UK-resident company, non-UK resident company), unless details for all partners (and indirect partners) are included in the partnership statement.
If a partnership (the reporting partnership) is a partner in more than one partnership carrying on a trade, profession or business, the legislation will provide that the profits or losses from each partnership must be shown separately from any other income or losses, on the reporting partnership’s return.
Clarification has been provided about the basis periods of indirect partners and the notional trade they carry on in an underlying partnership. This makes it clear that basis periods apply for all partners allocated trading results from a partnership, whether they invest directly or indirectly. This measure also deals with the timing of any cessation of trade.
UTR requirement relaxed
The rule requiring a Unique Taxpayer Reference (UTR) for each and every partner to be included in the partnership return is being relaxed. In the past this has been particularly problematic for investment partnerships with overseas investors. Under the new legislation, a UTR will no longer be required for partners where the partnership is making a return under the Common Reporting Standard (CRS) or under the Foreign Accounts Tax Compliance Act (FATCA). The partnership tax return will, however, need to include a statement that the relevant provisions have been met with regards to making a return.
A new process is being introduced where a dispute arises between partners over how the profits are allocated (rather than the overall quantum of profits), which will allow disputes over the correctness of the allocation of profits (or losses) for tax purposes to be referred to the tribunal to be resolved. Disputes over the quantum of partnership profits will not be within the scope of the new process. The provisions require that the amounts of profits and losses allocated to partners in a partnership return are considered final for tax purposes, even where the person would not otherwise be chargeable to tax on the partnership profits. A partner will be able to appeal direct to the tax tribunal within twelve months of the date of filing of the partnership tax return. They will no longer be able to enter a different figure on their own tax return to that shown on the partnership tax return and leave it to HMRC to consider the issue.
This change will clearly have effect where there are disputes within a partnership and in particular where a partner has left a firm in acrimonious circumstances.