This measure makes changes to the income tax calculations of certain partnerships and is part of a wider policy of government to tighten the tax rules for partnerships.
The draft legislation is now out and the Treasury says that this ‘provides additional clarity over aspects of the taxation of partnerships’.
But it will raise costs for partnerships, as partners and some partnerships may be required to calculate partnership profit on all four possible bases of calculation (for example, UK resident individual, non-UK resident individual, UK resident company and non-UK resident company), and report these in the partnership return.
There will be some winners as around 1,300 investment partnerships will no longer have provide a tax reference for partners who have no charge to tax or business activity.
HMRC expects that there will be ‘fewer interventions, as a result of clarifying various partnership rules and requiring partners to return the profit/loss allocation shown on the partnership return, which will generate operational savings’.
Partners will be able to refer profit/loss allocation disputes to the tribunal. HMRC is going to set up a new IT referral system for partners to notify them about disputes referred to the tribunal, which is likely to cost up to £100,000 to develop.
The rules for the allocation of partnership profits and losses will have effect for accounting periods and periods of account starting after the date of Royal Assent to Finance Bill 2017. Likewise the changes to returns for overseas partners in investment partnerships will have effect for returns made after enactment of the Bill.
Other changes will have effect for 2018-19 returns.
The main issues focus on how the current rules and reporting operate in particular circumstances where a partnership has partners who are bare trustees for another person or that are partnerships; and the allocation and calculation of partnership profit for tax purposes.
Under the new rules, ‘the provisions ensure that partnership returns contain sufficient information to facilitate HM Revenue and Customs (HMRC) assurance work,’ the Treasury stated.
In addition, the measure makes it clear that the allocation of partnership profits shown on the partnership return is the allocation that applies for tax purposes for the partners but provides a new, structured mechanism for the resolution of disputes between partners over the allocation of taxable partnership profits and losses shown on the partnership return.
It also reduces the amount of information which has to be shown on the partnership return for investment partnerships that report under the Common Reporting Standard (CRS) and who have non-UK resident partners who are not chargeable to tax in the UK.
The measure was first announced at Budget 2016 and was subject to a consultation published in August 2016, entitled Partnership taxation: proposals to clarify tax treatment.
Policy paper, HMRC Partnership taxation: proposals to clarify tax treatment is available here.