Partnerships: A review of two aspects of the tax rules

1. Partnerships: A review of two aspects of the tax rules Consultation open meeting 21 June 2013

2. Purpose • Explain the problem & Government objectives • Outline the consultation process • Brief introduction to consultation proposals • Gather views and suggestions to inform detailed design

3. Agenda Introduction 1. Context 2. Government Objectives • Timeline & Consultation Process • The Consultation Proposals – Disguised Employment • Questions & Discussion • Break (Tea/Coffee) 6. The Consultation Proposals – Profit & Loss Allocation Schemes • 7. Questions & Discussion

4. What’s the problem? Legitimate commercial structures Regulatory position Commercial flexibility Inconsistency & unfairness Tax avoidance

5. Government Objectives • Restoring level playing field • Prevent unfairness and market distortion • Stopping partnerships – not just Limited Liability Partnerships - from being used in ways that can give rise to certain tax advantages

6. Consultation – general approach • A starting point for making the changes, not an end point. • Certain fixed parameters, but we don’t have all the answers • If you have a better idea, let’s hear it

7. Indicative Timeline 2013 Informal consultation Working on detailed policy and legislative design Informal consultation FB14 Comment period Formal consultation Sept- NICs Bill May – August Oct – Nov Autumn Statement Budget Announcement Draft FB2014 legislation Summary of responses Draft Technical Guidance

8. Indicative Timeline 2014 Informal consultation Working on detailed guidance and implementation Evaluation Implementation July March April Royal Assent on FA 2014 Final Technical Guidance Budget? Effective Date = 6 April 14

9. Consultation Proposals

10. Part 1 – Disguised Employment Current tax rules • Limited Liability Partnership (LLP) members are taxed as if they are partners in a partnership established under Partnership Act 1890 (traditional partnership) even if they are engaged on terms closer to those of employees. Problem • In the absence of the LLP Act 2000, the LLP would be taxed as a company. Under the LLP Act, individual members are taxed as self-employed partners and company members are liable to corporation tax. • Avoidance: low paid workers taken on as LLP members giving rise to loss of employment benefits and protection. • Unintended unfairness: high paid workers benefit from self-employed status leading to loss of employment taxes payable.

11. Change Proposals Facts • First Condition • Is the LLP member a salaried member by reference to normal tests as set out in the Employment Status Manual published on the HMRC website? • Second Condition • No (significant) economic risk • Not entitled to a share of profits; and • Not entitled to a share of any surplus assets on a winding up Salaried Member? Any issue to determine contract of service Second Condition

12. Questions? Coffee

13. Part 2 – Profit & Loss Allocation Schemes Current tax rules • Under partnership law, it is not necessary for profit sharing ratios to be in proportion to contributions, effort or capital, to be the same from year to year, or for profits and losses to be shared in the same proportions. • This flexibility is available for all partnerships not just LLPs. Problem • Tax advantages arise from increasing use of this flexibility. • Mixed member partnerships: profits and losses • Different tax attributes.

14. Profit & Loss Allocation Schemes: Change Proposals

15. Questions?

16. Thank you Please send further enquiries and comments to By email: partnership.review@hmrc.gsi.gov.uk By post: Partnerships Review Consultation c/o Tax Administration Policy Team, HM Revenue & Customs, 1C/06, First Floor, 100 Parliament Street, SW1A 2BQ