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Clarification of the tax treatment of partnerships

Posted on 4 October 2017

Clarification of the tax treatment of partnerships

Draft legislation was published on 13 September 2017 which clarifies the rules for the allocation and calculation of partnership profits and sets out the requirements for certain partnership returns.

The government's aim is to clarify areas of uncertainty and to clamp down on what it perceives to be a manipulation of the rules relating to the allocation of taxable profits by partnerships to obtain a tax advantage.

Under the draft provisions:

  • Partnership profits will be allocated between partners in the same ratio as the commercial profits of the partnership.
  • The allocation of profits shown on a partnership return will be used by partners when reporting their allocation of profits.
  • Where a beneficiary of a bare trust is entitled absolutely to any partnership profits, but is not themselves a partner, that beneficiary will be subject to the same rules for calculating and reporting profits as actual partners.
  • The share of profit or loss for each partner that is a partnership must be calculated on all four possible bases of calculation (for example, UK resident individual, non-UK resident individual, UK resident company and non-UK resident company) unless details for all partners and indirect partners are included on the partnership statement.
  • Certain investment partnerships will not be required to return the tax reference for a partner if that partner is not chargeable to income tax or corporation tax in the UK and the partnership reports details of the partner to HMRC under the Common Reporting Standards. 
  • Partnerships that are partners in one or more partnerships that carry on a trade, profession or business will be required to report profits and losses from each partnership separately on their returns.

The legislation also provides a mechanism for resolving any disputes between partners as to how profits and losses should be allocated for tax purposes.

The changes to filing requirements for investment partnerships may be of particular interest to non-UK resident investors in funds formed as English limited partnerships. We are in touch with HMRC to clarify whether returns should be filed where an investor is not otherwise trading in the UK, and UK tax (if any) is dealt with by withholding at source.

Many of the changes will be welcomed for the clarity they offer. However, there will be an additional compliance burden for those partnerships affected by increased reporting requirements, particularly those that will be required to calculate partnership profit on all four possible bases of calculation.

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