The Chancellor announced further measures from the government to clamp down on tax avoidance and aggressive tax planning.
The Chancellor announced further measures from the government to clamp down on tax avoidance and aggressive tax planning that follow on from the introduction of the General Anti-Abuse Rule and disguised remuneration legislation, the closure of various tax loopholes and the action against promoters of high-risk tax avoidance schemes.
Following the announcement of a review of the rules for partnerships in Budget 2013, and a consultation document issued in May 2013 about changes to tax rules to counter the use of limited liability partnerships to disguise employment relationships and the tax-motivated allocation of business profits to corporate partners, the Autumn Statement confirmed that the proposals will be taken forward.
In particular in respect of partnerships with mixed membership, the government has published draft legislation to be introduced in the Finance Bill 2014 and effective mainly from 6 April 2014. The legislation will cause a reallocation of profits where partnership profits are allocated to a non-individual partner in circumstances where an individual partner may benefit from those profits and will deny certain tax loss reliefs where partnership losses are allocated to an individual partner rather than a non-individual one mainly to achieve a loss relief.
The reallocation of excess profits from a non-individual partner to an individual partner will apply where:
- the non-individual partner has a share of the partnership’s profits
- the non-individual’s share is excessive in terms of notional return on capital contributed and in respect of notional consideration for the services provided to the partnership
- the individual partner has the power to enjoy the non-individual’s share or the non-individual’s share is effectively deferred profit of the individual
- it is reasonable to suppose that the whole or part of the non-individual’s share is attributable to that power or to the deferred profit arrangements.
The legislation also includes provisions that will similarly reallocate profits to an individual who is not a partner if it is reasonable to assume that the individual would have been a partner if the anti-avoidance rules would have not been in place.
Additionally, the legislation denies certain income tax loss reliefs and capital gains relief for a loss allocated to an individual partner where the individual is party to arrangements, the main purpose of which, or one of the main purposes of which, is to secure that some or all of the loss is allocated to the individual with the intention of obtaining relief.
The Autumn Statement also announced action to prevent employers and employment intermediaries from avoiding employer NICs and circumventing their employer obligations. Legislation will be introduced to the effect of preventing intermediaries from using contrived contracts to disguise the employment of workers as self-employment.
In respect of tax avoidance schemes, the Chancellor announced that new requirements will be introduced for users of failed avoidance schemes to oblige them to settle the dispute where the scheme used has been defeated in another party’s litigation through the Courts, with penalties attached for non-compliance, and to pay the tax in dispute with HMRC upfront.
With regard to high-risk promoters of tax avoidance schemes, the government will introduce objective criteria for identifying and publishing the names of high-risk promoters, seeking more information from them and applying penalties where there is failure to comply.
ACCA will provide more in-depth analysis around partnerships, including worked examples, in the 20 December issue of In Practice.