Chancellor George Osborne yesterday confirmed that the government is pushing ahead with plans to “ensure the tax advantages of partnerships aren’t abused” – but the immediate introduction of anti-avoidance rules has been dubbed “shocking”.
In May’s Budget, the government announced a review of partnerships and yesterday’s Autumn Statement concentrated on the element focused on what the Treasury described as “the tax-motivated allocation of business profits” in mixed partnerships of individual and corporate partners.
This enables partnerships to take advantage of either lower corporate tax rates or individual loss reliefs, depending on how the profits are allocated.
The partnership review also looked at measures to counter the use of limited liability partnerships to disguise employment relationships. The Autumn Statement confirmed that this will also go ahead.
The changes – which were criticised by the Law Society and City of London Law Society among others – will take effect from 6 April 2014, with the exception of anti-avoidance rules concerning tax-motivated profit allocations. These rules came into force yesterday “in order to protect against risks to tax revenue”.
More details are due on 10 December, when further documents will be published, including draft clauses for the Finance Bill 2014, tax information and impact notes, and responses to consultation on Budget announcements.
Eloise Walker, a tax partner at national law firm Pinsent Masons, said the immediate introduction of the anti-avoidance rules “is pretty shocking from a public policy and legitimate taxpayer expectation perspective – although maybe not so unsurprising given HMRC’s fixation on tax revenues at the moment”.
Bill Dodwell, head of Deloitte’s tax policy group, said the mixed partnership reforms “aim to charge tax at income rates on profits allocated to the corporate. This will hit hedge funds as well as many smaller professional partnerships, which have used companies to help with working capital”.
The Treasury said that during the consultation, it received new information showing that the impact on alternative investment fund managers who operate as partnerships will be greater than anticipated. As a result this will add nearly £2bn to the £1.3bn revenues that these measures are already expected to realise.