2013 Budget Changes Affecting LLPs And Partnerships

Summary

A number of measures were announced at the time of the Budget on 20 March 2013 that affect many businesses involving LLPs and partnerships.

Spring 2013 consultation on the use of partnerships for avoidance in the areas of disguised employment relationships and manipulation of profit/loss allocations. Review on simplification of partnership taxation. Changes to the close company loan to participator anti-avoidance rules. It is to be hoped that the changes arising from these announcements will not affect genuine commercial arrangements used by LLPs and partnerships. However it will be desirable for all firms to review their individual arrangements. As a matter of urgency all loans by close companies that involve a partnership should also be reviewed as legislation aimed at avoidance in this area is effective from 20 March 2013. A close company is one that is controlled by five or fewer participators (and their associates), or by participators who are directors (subject to some exceptions).

Spring 2013 consultation

The two areas highlighted on 20 March for consultation in the spring are: (i) the removal of the presumption of self employment for LLP members together with the use of LLPs to disguise employment relationships and; (ii) the manipulation of profit/loss allocations by partnerships involving companies and /or trusts or other vehicles.

The consultation may have been initiated as a result of the increasing mixed use of corporates and LLPs in business structures, but also because of the Legal Services Act 2007 coming into force in October 2011, and the difference in tax rates applicable to profits taxed within a corporate and those taxed within an LLP or partnership structure.

Office of tax simplification (OTS) review of partnerships

In addition, the government has asked the OTS to review ways to simplify the taxation of partnerships and more focused consultation will take place following an initial scoping exercise. If changes are found to be necessary, this will be the subject of a future Finance Bill.

There are a number of areas around the administration of partnership tax issues and disputes that would benefit from improvement. Clarification on the tax transparency aspects of partnerships for a range of taxes and reliefs may also be an area for discussion.

Close company loans to participators

Subject to certain exceptions, the close company loan to participator rules operate to charge the company lender an amount as if it...