Partnerships Under Attack – By Mark Morton

The Autumn Statement continued the theme of the Government's crackdown on avoidance, particularly in the area of partnerships. This continues to be a developing area but it appears clear that the Government will proceed with many of their proposals, if only because HMRC estimate that the changes will raise £1bn annually!

There are several areas of change:

Profit allocation for 'mixed' partnerships

Legislation is being introduced in relation to 'mixed' membership partnerships. A mixed membership partnership is a partnership or LLP that has, as partners or members, both individuals and persons who are not individuals e.g. companies, trustees and LLPs. The legislation reallocates excess profits from a non-individual partner to an individual partner where the following conditions are met:

• a non-individual partner has a share of the firm's profit;

• the non-individual's share is excessive;

• an individual partner has the power to enjoy the non-individual's share or there are deferred profit arrangements in place; and

• it is reasonable to suppose that the whole or part of the non-individual's share is attributable to that power or arrangements.

The legislation includes provisions so that excess profits can be reallocated to an individual who is not a partner if it is reasonable to suppose that the individual would have been a partner but for the new rules and the whole or part of the non-individual's share is attributable to the individual's power to enjoy the non-individual's share or to deferred profit arrangements.

Artificial loss schemes

Legislation is also being introduced to deny certain income tax loss reliefs and capital gains relief for a loss allocated to an individual partner where the individual is party to arrangements, the main purpose, or one of the main purposes, of which is to secure that some or all of the loss is allocated, or otherwise arises, to the individual, instead of a non-individual, with a view to the individual obtaining relief.

Treatment of salaried members of LLPs

HMRC are concerned that some members of LLPs are effectively employees and so the LLP is avoiding employer's NIC and operating PAYE. The legislation attempts to rectify the tax position by setting out conditions under which the member is to be treated as an employee for tax purposes.The legislation is aimed at individuals who are performing services for the LLP in the capacity as a member but satisfy all three basic conditions:

• Condition A - it is reasonable to expect that the amounts payable to them will be wholly, or substantially wholly, disguised salary;

• Condition B - the individual has no significant influence over the affairs of the partnership; and

• Condition C - the individual has no significant capital investment in the partnership.

This is only a very brief overview of the changes and the Solicitors Conference will review them in fine detail and what they mean for legal practices.