Simplifying Tax for Partnerships

20 January 2015

Further detailed proposals for simplifying tax rules for partnerships have been set out by the Office of Tax Simplification (OTS).

The OTS report sets out a series of recommendations for improving the tax system for partnerships, building on the OTS’s two previous reports on this subject. This third and final report on partnerships also details the progress made on taking forward the recommendations in the OTS’s interim report.

Partnerships, which make up around 10 per cent of UK businesses, are a business structure where two or more people share control and liability. Many larger partnerships these days operate as ‘LLPs’ – Limited Liability Partnerships. The other basic business models are sole-trader and limited company.

John Whiting, Tax Director of the Office of Tax Simplification, said:

“Partnerships are a valuable business arrangement that are used for enterprise and deserve support and encouragement.

Progress has been made since our previous report but there is undoubtedly more that can be done to make the tax system simpler and easier for these businesses.

We have recommended a series of changes to help these businesses and we look forward to further progress being made. As always, these are based on the evidence gathered by the OTS during extensive fieldwork and we are grateful to the many contributors to our work.”

Recommendations in the final report include:

  • The introduction of clear and comprehensive guidance for partnerships when they register with HMRC;
  • Allow partners to claim their allowable expenses incurred against their share of the profits;
  • A range of improvements to help partnerships with international operations, including a requirement for future Double Tax Agreement renegotiations to always consider partnerships issues;
  • Clear guidance to be included in the Partnership Manual to address Group Relief on structures involving limited liability partnerships, which we understand HMRC has agreed to;
  • Develop a revised and updated HMRC Statement of Practice D12 to govern partnership capital gains and address issues around entrepreneurs relief;
  • Introduce two new alternative routes to gift aid for partnerships.

HMRC’s publication of the consolidated Partnership Manual in April 2014 (following an earlier OTS recommendation) is welcomed. This will save businesses considerable time while further guidance on VAT registration involving limited partnerships and joint ventures, and VAT grouping for LLPs is now available.

However the OTS repeats its call for HMRC to create a Head of Partnerships role to ensure a proper focus on partnerships in tax policy. The OTS also reiterates that a liaison group to discuss specialist partnerships issues is needed.