OTS addresses the partnership issues that HMRC hasn’t reached

Tue 01 Apr 2014

The Office of Tax Simplification (OTS) recently published a review of partnerships following discussions with a diverse range of groups across the country. The Government appears to be receptive to the report’s recommendations 

They identified four types of partnership:

• small – two to three partners;
• medium – four to 20 partners;
• large – over 20 partners, typically larger firms of accountants and lawyers; and
• specialist businesses – typically investing in property development or venture capital.

The OTS concluded that the current ‘one size fits all’ system overburdens smaller partnerships with complex technical tax issues especially when compared to similar sized sole trader businesses. Therefore the OTS focused on reducing the burden on small partnerships and recommended a more strategic approach to the tax system for partnerships in which new tax laws take account of partnerships as well as sole traders and companies. OTS recommended a three-stage process for reform.

Short term fixes

• HMRC to create free filing software for smaller partnerships.
• Clear guidance on VAT grouping for LLPs.
• Streamlined process for issuing unique taxpayer references for foreign partners.
• Clearer guidance on stamp duty land tax following changes in profit sharing ratio.
• Review and update the guidance on business property relief for partnerships.
• HMRC’s Statement of Practice D12 for capital gains should be brought up to date.
• Double Taxation Agreements should deal with partnerships fully.
• Simplification of basis periods for non-trading partnership income.
• Review of late filing penalties for partnership returns.
• Educating partnerships about their obligations.
• Update and publicise the 1890 Partnership Act.
• Review the application of the Annual Investment Allowance to mixed member partnerships.
• Removal of the obligation to submit partnership returns for small partnerships to reduce their administrative burdens.
• Allow partners to claim personal expenses.

Medium–term recommendations:

Long-term suggestions:

The Government’s response

In a letter to the OTS David Gauke set out HMRC’s immediate response to the suggestions, dealing in particular with the short-term fixes.

• HMRC will publish a draft partnership tax manual for comment in April 2014. The manual will provide links to relevant partnership guidance in other HMRC manuals.
• HMRC is working with BIS to publish a model partnership agreement and believes that this can be integrated within the consolidated guidance.
• HMRC to examine cost and feasibility of adding a box to the short return for partnerships to allow gross interest to be included rather than net.
• HMRC is already looking at the best way for companies to report partnership income.
• HMRC will revise the guidance to clarify when entrepreneurs’ relief is due. This will then be included in the HMRC partnership tax manual.
• HMRC is already reviewing the process for some non-UK resident partners, and will look at the scope for further simplification.
• HMRC will need to consider this proposal in more detail, however, it is very likely that the costs associated with the change will rule out taking this further.
• Production of free software for partnerships would involve significant costs and it is very likely that these will rule out taking this further.
• HMRC has worked with representative bodies to clarify its IHT  guidance (see Taxguide 01/14). This will be included in the HMRC partnership tax manual.
• HMRC to clarify requirements as regards limited partnerships and joint ventures for the purposes of VAT in revised guidance on VAT registration which will be published in 2014/15, and will then be included in the HMRC partnership tax manual.
• Guidance on VAT grouping for LLPs will be covered in revised guidance on VAT registration which will be published in 2014/15, and will then be included in the HMRC partnership tax manual.