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21 Jan 2014 11:07am

Tax of partnerships an “afterthought”

A separate tax code for partnerships would work in theory but not in practice, says John Whiting, director of the Office of Tax Simplification (OTS)

The separation would give more clarity to the rules regarding partnerships but would “take an awful lot of doing” , meaning in practical terms it is “just not worth it”.

Whiting was speaking yesterday before the House of Lords Finance Bill Sub-Committee, set up to inquire into the draft Finance Bill 2014, specifically on the taxation of partnerships.

Things can fall through the cracks, which leads to mistrust on all sides

John Whiting

How HMRC treat partnerships has come to the fore recently following George Osborne’s announcement in the Autumn Statement that he “will ensure tax advantages of partnerships aren’t abused.” This followed rules proposed in Budget 2013 aimed at preventing large professional partnerships and wealthy individuals concentrated in private equity from abusing the rules on compensating adjustments in the transfer pricing code.

The Finance Bill confirmed the partnership anti-avoidance rules, which will apply to the hedge fund industry, and the costing for partnership. The proposals are expected to raise £1.9bn over 4 years.

Large firms argue that the complexity and disruption that the proposals will cause will encourage businesses to incorporate. Paradoxically, they say, this could end up lowering the amount of tax take rather than increasing it as the Treasury expects.

Whiting and the OTS were commissioned to review the area, and will publish their report later this week during which they had around 50 meetings with 1000 people in partnerships. Whiting said the most surprising finding was the proportion (10%) of UK business made up of partnerships.

He found that “surprising as they’re somewhat of an afterthought” and “don’t get the right attention.”

The report also found that there is a rise in the “City” type partnerships, used by investment and private equity firms.

The structure is seen as a way to pay less tax on money that needs to be reinvested in the partnership as working capital, although some suggest that these have been used as tax avoidance schemes. Whiting was asked whether large corporate partnerships should be treated differently to those on a smaller scale, such as the example of a husband and wife running a business.

“It comes back to that strictly there is not such a thing as a partnership tax, but the underlying rules are the same, though HMRC does administer them differently," he said.

“Things can fall through the cracks, which leads to mistrust on all sides. The tax system copes with the differences but there are strains. The paradox is the Big Four have experts, advisers and receive help from HMRC whereas those on a smaller scale have little guidance with the administrative side.

“There can be perfectly good business reasons for entering into a corporate partnership. In some instances it is to accumulate profits. When does this go from commercial to avoidance? Difficulties lie when determining when it has gone beyond reasonable into excessive,” he added.

Asked whether the law is fair, he said, “I can see plenty of scope for argument. I can see some practical difficulties. There will be difficulties with salaried partnerships as well, until experience is accumulated.”

He disagreed with claims that the system encourages avoidance but admitted that some loss planning and loss schemes have led to avoidance.

The OFT looked at partnership systems in other countries, including Australia, America, the Commonwealth but “have not found anywhere doing it better.”

Whiting suggested creating a director of partnerships at HMRC, as there is no designated expert available at the moment.

Raymond Doherty

 

Related articles

Autumn Statement 2013: Tax 

Warning over “too complex” partnership tax changes 

The taxation of partnerships: the changes ahead 

Government should do more to simplify tax 

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