OTS interim report points the way towards partnership tax reform

OTS interim report points the way towards partnership tax reform

Wed 05 Feb 2014

The OTS has issued an interim report on the taxation of partnerships which sets out its longer-term agenda for reviewing how partnerships, including LLPs, are taxed and offers suggestions for improvements that could be made in the meantime.  Whilst OTS recommendations are merely that we expect some of those in this OTS report will be acted upon, in particular their “short term fixes” and suggestions for the medium term. We do not list all the suggestions made in the 82 page report but select the more significant or interesting ones.

Short term fixes

  • An LLP must have a members’ agreement but a “general” partnership is not required to have any constituting document.  Points not covered by any agreement may instead be subject to the Partnership Act 1890.  The basic structure of that Act is sound but due for an update. Therefore the Department for Business, Innovation and Skills should produce an updated standard partnership agreement because the absence of up to date default clauses causes tax uncertainty.
  • HMRC’s partnership guidance is currently spread over many manuals and needs to be consolidated. HMRC have started work on drawing together all provisions relating to partnership taxation, which the OTS welcomed.. 
  • Partnerships entitled to use the short return (turnover < £79k) should be permitted to include interest income in their trading result.
  • A new section should be added to the corporation tax return to capture share of partnership results.
  • HMRC should issue more detailed guidance on how the CGT entrepreneurs’’ relief applies to disposals of interests in partnerships and LLPs.
  • The administrative problems for non-UK resident partners in obtaining a UTR from HMRC (or the administrative problem of multiple UTRs) should be resolved.
  • The taxation of groups of individuals investing in UK investment partnerships should be simplified: this currently presents particular difficulties for non-residents and non-doms.
  • HMRC should offer free tax return software for small partnerships (suggested max. turnover £250k or max. number of partners 3 or 4).
  • HMRC to clarify guidance on basis of SDLT charges on partnerships owning interests in land when there are changes in profit shares.
  • HMRC guidance on IHT aspects of partnerships, in particular partnerships with “subsidiary” companies where BPR is in point, need reviewing and updating.
  • VAT registration procedures for limited partnerships (LPA 1907) and joint ventures need to be clarified.
  • HMRC need to make their guidance on VAT grouping entitlement of LLPs clearer.

Medium term suggestions

  • Update statement of practice D12 (chargeable gains of partnerships) to make it more accurately reflect modern business practice.
  • Ensuring that partnerships secure effective double tax relief (both inward and outward).
  • Allow partnerships to claim gift aid in the same way as companies (implying that if implemented, gross donations).
  • Smaller “mixed” partnerships (those with companies and individuals) should be entitled to the annual investment allowance.
  • Partners should be entitled to make their own claims to deduct business expenses incurred personally (always a problem and an area of uncertainty since the Vaines case.
  • Consider abolishing stamp duty (but not SDLT or SDRT) on partnerships
  • Relieve changes in partnership property shares from SDLT on partnership changes except to the extent that cash changes hands

The OTS hope that many of their short term fixes are suitable for fairly swift implementation but accept that their full review of partnership tax will be a long drawn-out process.

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