Partnership tax changes in Finance Bill 2014

by Tax Faculty Team on 10.02.2014 18:20

Proposed new rules for salaried members in LLPs and to the non-corporate member rules for all partnerships, involve significant additional compliance cost for LLPs

On 3 February 2014, the Tax Faculty submitted its response, TAXREP 05/14, to the draft Finance Bill 2014 clauses on partnership tax and related HMRC Technical Note and Guidance, published by HM Treasury and HMRC respectively on 10 December 2013.

Some of these proposals were the subject of earlier consultation and while some of these have been addressed, the fundamental challenges we made then are still present in the revised proposals.

Implementation timetable
The Office of Tax Simplification has been conducting a review of partnership tax, the results of which were published on 22 January 2014. In our view, introducing complex legislation, affecting many businesses, potentially leading to structural change while the results of the OTS review are still being considered, seems an unnecessary complication and does little to provide much needed stability and certainty to the UK tax system.Most importantly, we do not think these proposals should be rushed through for implementation from 6 April 2014. These proposals mean radical restructuring for many businesses which needs more time and further consultation about the revised detail and practical implementation.

A few key issues
The proposed new rules for salaried members in LLPs and to the non-corporate member rules for all partnerships, will involve a significant additional compliance cost for LLPs.

The increasing divide between employment law and tax law leads to more uncertainty, complexity and unfairness as individuals are taxed as employees, but without equivalent employment rights. The proposals to tax LLP salaried partners as employees will create a further group of individuals who will be in this position.

It is apparent that many of the problems being addressed in these proposals stem once again from the different tax cost of employment and self employment, together with the different rates of tax paid by small companies and unincorporated businesses. These are structural problems in our tax system and until they are resolved, we will continue to see further legislation being brought forward which merely makes a complex situation even worse.

Transitional rules
We are particularly concerned about the transition. The new rules will not be finalised until Finance Act 2014 is enacted. By this time, in summer 2014, some businesses will have already been affected for 15 months or more. The changes will affect partnership periods started after 6 April 2013. Although a split year option could be taken, partnerships tend to operate profit sharing arrangements for entire periods. Other issues they will need to consider in the meantime, include:

  • Other tax matters such as entrepreneurs’ relief, SDLT etc.
  • Personnel matters on admitting new partners, or changing terms for “equity partners”. New employment rights or perhaps the cash flow requirements of the business.
  • Regulatory matters. For example Financial Conduct Authority regulation is by reference to an entity and it can take some time to achieve a move from an LLP to a company.
  • The operation of Real Time Information (RTI) for partners who are now employees.

The new rules will affect individuals who move from self-employed to employed status as at 5 April 2014.

The 2013/2014 taxable profits of these individuals will be different to those originally estimated. For example, with a 30 April year end, their profit share for the year ended 30 April 2013 would have been taxed in 2013/14. Now, using cessation rules, they will instead be taxed on their profit share to 30 April 2013, plus their profit share to 5 April 2014, less their overlap relief. This may mean that their payments on account for 2013/2014 will also need to change. The first payment on account for 2013/14 was on 31 January 2014, which has already passed. Without certainty of the partnership’s profit figures, and with only draft legislation to go on, it is impossible for such individuals to have made the correct payment on account.

Earlier consultation
The initial proposals were published in May 2013, to which we responded in TAXREP 35/13 and in which we raised a number of concerns. The new Tax Consultation Framework launched by the Government in March 2011sets down an improved consultation process. In this case, we are not convinced that the Government is always listening to the responses and ensuring that the proposals are amended to take account of legitimate concerns. There is a danger that the process is still seen more as an end in itself rather than a means to an end, namely improved legislation that meets the Government’s policy objectives while being easy and practical to implement and administer. In our view this is evident in the current proposals.

We are concerned that the proposals are too complex for practical implementation and are disproportionate to the problems they are attempting to resolve. The stated objectives of the proposals are to level the playing field and to tackle tax avoidance, but we are not convinced these proposals support those objectives.