Mixed partnerships of corporate and individual partners, will face new tax regulations from 6 April 2014, it was revealed in the Autumn Statement.
A change to tax regulations has been expected for partnerships though few, including the Law Society and City of London Law Society, expected the reforms outlined by Chancellor Osborne to be enforced so quickly.
The government will begin plans to ensure the tax advantages of partnerships aren’t abused immediately for anti-avoidance rules for tax-motivated profit allocations, while the majority of the changes will become active in April.
Autumn Statement 2013
In May’s budget, the government announced its intention to target revenues of £1bn by March 2019, however, in December’s autumn statement the Chancellor announced the government was broadening the scope in an effort to catch £1.92bn from œalternative investment fund managers (AIFMs). As AIFMs are largely hedge funds, this is expected to drive hedge fund managers out of the UK and towards the financial centres of Hong Kong, Switzerland and Singapore.
At present, partnerships are able to manage their taxes in three ways:
- Corporate partner: A corporate partner is only required to pay the much lower rate of corporation tax, therefore by channelling a portion of the profits into a corporate partner, the partnership reduces its liability for income tax.
- Self-employed partners: Up until the Autumn Statement, self-employed partners have been liable for income tax but not National Insurance.
- Transfer pricing: Transfer prices are charges for goods and services between related legal entities; they can therefore be misused by an enterprise to lower profits for its entities in jurisdictions with higher tax levies.
Commenting on the impact the reforms could have on partnerships, Catherine Heyes, senior tax manager at Menzies LLP said:
“The Chancellor stated that these partnership changes will be the biggest single revenue generator, which makes us concerned that the proposed changes may be extended beyond the original proposals and catch far more businesses than expected.”
The future of Partnerships
At Ralli Partnership Law we have years of experience advising our clients on which partnership structure will work best for them. We ensure that all our clients know the advantages of creating a partnership agreement for your business, protecting you against the worst case scenario should it arise.
If you would like to talk to one of our team about your current partnership, or you are interested in establishing a Limited Liability Partnership, please contact the specialist team at Ralli on 0161 832 6131.