Tax simplification for partnerships?
In July, the Office of Tax Simplification published an update into its Review of the taxation of partnerships. The final report is anticipated in time for the Chancellor to consider before the Autumn Budget.
The key themes of the Review include:
- Reducing the complexities and burdens for smaller partnerships, which are greater when compared with sole traders of a similar size.
- Tax policy, which is generally aimed at corporations and sole traders. There is therefore less consideration of the implications for partnerships and consequently less international understanding for this business model.
- HMRC’s own support. This is poorer for partnerships than for other business vehicles, including some less common such as trusts, pension schemes and charities.
- HMRC’s perceived aggressive attitude towards partnerships.
Interestingly, HMRC’s response so far to each of the above has been to deny these or defend its current approach.
The January interim report identified a series of short-term fixes, medium-term recommendations and long-term areas to investigate and the July update provides a progress report.
HMRC is progressing most of these.
It has for instance already published draft consolidated tax guidance for partnerships.
For partnerships which do not have a written partnership agreement, the Partnership Act 1890 still provides the default agreement terms, even 124 years later, and the OTS considers HMRC should provide greater guidance on the provisions of this Act, so that partners are alert to the consequences. HMRC has agreed to do this.
Most are still being reviewed, including:
- An update to HMRC’s statement of practice for partnership capital gains; and
- Allowing claims for business property relief from inheritance tax for a partnership holding shares in a trading company, so as to align its treatment with that of a parent holding company.
Disappointingly, many of these are making less progress.
For instance, the OTS wants to remove some of the illogical situations in which a stamp duty land tax liability can be triggered for partnerships: on retiring from a partnership where no money is paid for land; and on changes in income profit shares for property investment partnerships.
Furthermore, the OTS has found much support for allowing individuals to claim business expenses against their individual profit share rather than via the firm (quicker, more streamlined, simpler to understand, better reflecting the reality of what was happening). HMRC has raised its doubts about this, but the OTS considers HMRC’s objections unfair and unjustifiable.
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