Autumn Budget 2017: Proposals to clarify treatment of partnership taxation

Measures were announced at the 2016 Budget in response to proposals looking to clarify the tax reporting requirements of certain partnerships. A consultation followed and after the publication of a response document, it was announced that draft legislation would be published.

A number of changes were announced in today’s Budget that targeted how some partnerships report their profit shares and introduced a new measure to resolve disputes involving profit or loss allocation:

  • Beneficiaries of bare trusts who are absolutely entitled to the income of that trust and that income consists of the profits of a firm, will be subject to the same rules for calculating profits and reporting as actual partners, even if the beneficiary is not a partner in that firm.
  • Where a partnership has partners which are also partnerships (referred to as participating partnerships), it will need to include, for each of the participating partnerships, its share of the partnership’s income or loss which will be calculated on all four possible bases of calculation unless the partnership statement includes details for all the partners and direct partners.
  • Partnerships not carrying on a trade or profession or UK property business will not be required to return tax references for partners who are not subject to UK income tax or corporation tax, and the partnership reports the relevant partner’s details to HMRC under the Common Reporting Standards.
  • Where a partnership is a partner in one or more partnerships that are a trade, profession or business, the profits or losses from each partnership will need to be shown separately from any other income or losses on that partnership’s tax return.
  • Partnership profits will need to be allocated between partners in the same ratio as the commercial profits.
  • A new process is being introduced whereby disputes over profit or loss allocation for tax purposes can be resolved by referral to the tribunal.

The majority of these rules will take effect from the date after the 2017 Finance Bill receives Royal Assent.

Partnerships, limited partnerships and limited liability partnerships will be affected by one or more of the proposed changes. Affected entities will need to review the way they are currently reporting and make the changes that will enable them to comply with HMRC’s updated requirements.