HMRC Review Of Certain Tax Treatments Of Limited Liability Partnerships And 1890 Partnerships Manipulating Profit And Loss Allocations?

On 20 May HMRC published a consultation document to review two aspects of the current tax treatment afforded to members of Limited Liability Partnerships and 1890 Partnerships:

(i) the presumption that members are self-employed for tax purposes, so called 'disguised employment', that is, HMRC's attempt to tackle their perceived abuse of membership of LLPs to avoid employment taxes (for further details please see ' LLP Members - Disguised Employment? )'

(ii) perceived manipulation of profit and loss allocations to generate a tax advantage by, for example, the use of corporate members by both LLPs and general partnerships.

This briefing note addresses issues arising from part (ii) of the Consultation.

The Current Position

In partnerships, each partner is charged to tax on the profits allocated to them in accordance with the profit sharing arrangements in place for that period rather than on the basis of profits drawn from or distributed by the partnership. Partnerships have a great deal of flexibility around the allocation of profit or losses between the partners, for example, profits and losses do not need to be shared in proportion to contributions of capital or effort.

The Consultation

HMRC now considers certain uses of this flexibility, in relation to profit and loss sharing arrangements to secure tax advantages, to be unfair. There are three types of arrangement that the Government plans to address:

1. LLPs and Partnerships with Mixed Membership - Profits

   In this type of arrangement the partnership has both individual members and corporate members and profits are allocated to a corporate member that pays a lower rate of tax, allowing the individual partners to ultimately obtain the benefit of those profits (directly or indirectly) as a result of having an 'economic interest' in that corporate member. HMRC also highlights profit deferral arrangements and working capital arrangements through a corporate member as securing tax advantages by allowing individuals to access lower corporation tax rates but without the full tax consequences of operating as a company. The arrangements are viewed as purely tax-driven as the allocation to the company would not take place if the company was taxed at the same rate as the individual members.

   HMRC proposes, that where: (i) a partnership consists of members who are persons within the charge to income tax e.g. individuals, and one or more members who are persons not within the charge to income tax e.g...