Changes to Partnership Taxation – an unintended consequence?

Matthew Hall profile image

Matthew Hall, Partner

Matthew is Head of Tax Services at Wilkins Kennedy. He has been a Partner at the firm since 2005 having previously been with a Top 10 practice.

Oct. 25, 2017

 

The draft finance bill includes legislation which will make various changes to partnership taxation – but does this include a clause which could affect many professional partnerships?

The legislation has been drafted following a consultation process looking to “clarify tax treatment” of partnerships.  The areas considered were:

  • Clarifying the partner chargeable to tax
  • Structures that include partnerships as partners
  • Administration of Partnerships with only investment income and non UK partners
  • Allocation and calculation of partnership profit

As can often be the case, the majority of the consultation seemed rather straightforward, uncontroversial and having limited application.  However, a particular clause will affect more partnerships than perhaps envisaged.

For accounting periods starting after Royal Assent, the taxable profits of each partner shall be determined to be the same proportion of their share of the accounting profits.  Whilst this may seem rather innocuous, and indeed completely logical, it can create some interesting anomalies for partnerships with “fixed share” equity partners.

For example, a partner may have a fixed entitlement to £100,000 per annum in a partnership whose accounting profits were £1,000,000 for the year.  When adjusted for “disallowable” items, the taxable profits for the partnership turn out to be £1,100,000.  Under the new rules, the “fixed share partner” will be taxed upon 1/10th of the £1,100,000, meaning his tax liability be calculated by reference to £110,000 income despite the fact that he only has a fixed entitlement of £100,000.

Some will believe that the above is perfectly logical and indeed entirely fair that all partners should bear part of the disallowable costs.  However, in many professional practices with a two-tier structure, this outcome will be far from what was expected.

The new legislation also directs that the partnership tax return will be determinative as to the taxable shares allocated to each partner.  This arguably places increased responsibility upon the “nominated partner” with the legislation also including a mechanism for disputing allocations amongst the partners.

What you should do now

Firms should start taking practical steps to identify whether the changes will affect their partners and then consider whether any changes to operations are required.  Additionally, all partnership should review their internal procedures for agreeing taxable profits and the responsibilities of the “nominated partner”.  If you would like to discuss how these, or any other changes will affect your partnership, please contact me or your usual Wilkins Kennedy contact.


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