In recent years, we have seen the growing use of so-called \u2018hybrid\u2019 partnership\/LLP structures.\u00a0 These \u2018hybrids\u2019 typically comprise a mixture of individual and corporate partners\/members (for simplicity, LLP members will also be referred to as partners).<\/p>\n
Although the use of \u2018hybrids\u2019 can sometimes be justified on a commercial or legal basis, they are often driven by tax planning motives.\u00a0 Significant tax savings can be obtained by allocating a sizeable share of the firm\u2019s profits to one or more of its corporate partners (which are, in turn, owned by the individual partners).\u00a0 Such profits can then be retained at low corporate tax rates and thus sheltered from high income tax rates.<\/p>\n
It is not surprising that hybrids have attracted HMRC\u2019s attention.\u00a0 This has resulted in a series of measures to counter the perceived abuse in this area.\u00a0 One important change is HMRC\u2019s new ability to re-allocate all or some of a corporate partner\u2019s share of profits to the relevant individual partners, thus subjecting them to higher rates of income tax.<\/p>\n
HMRC\u2019s power to reallocate profits to individual partners<\/strong><\/p>\n Under the Finance Bill 2014 rules, HMRC can trigger a reallocation of profits where there is no commercial justification for the profit sharing ratios.\u00a0 The rules only apply to accounting periods starting after 5 April 2014, although there are anti-forestalling rules could be triggered for planning undertaken from 5 December 2014.<\/p>\n Specifically, HMRC can re-allocate an \u2018excessive\u2019 profit share to the individual partner(s) under new s805C, Income Tax (Trading and Other Income) Act (ITTOIA) Act 2005 where the following conditions apply:<\/p>\n –\u00a0\u00a0\u00a0\u00a0 the capital\/assets it has contributed to the partnership\/LLP and\/or In HMRC\u2019s view, the return on capital should not exceed an amount that is economically equivalent to interest.\u00a0 It also seems that HMRC anticipate that services should be charged on a modest mark-up on cost, but this position is arguable where the company is providing highly skilled services.<\/li>\n Note that HMRC can also re-allocate an individual partner\u2019s allocated trading\/property business losses and capital losses where these should have been allocated to a corporate partner, where the main purpose of the arrangements is to enable the individual to take the tax benefit of those losses.<\/p>\n <\/b>Anti-avoidance rule for ‘non-partners’<\/strong><\/p>\n HMRC has anticipated the potential for avoiding statutory re-allocation of profit rules by removing \u2018individual\u2019 partners; for example, the ownership of an existing partnership or LLP could be altered to consist solely of corporate partners.<\/p>\n A new s805D, ITTOIA 2005 frustrates such planning because HMRC will be able to re-allocate profits to individuals who are not<\/i> partners if they have the power to enjoy those profits and would have been a partner were it not for the introduction of this legislation.<\/p>\n Based on the wording of the legislation, there is a decent argument that partnerships\/LLPs existing before 5 December 2013 which consist solely of corporate partners should not be caught by these rules, but will HMRC still seek to challenge them?<\/p>\n Compensation adjustments will be made to a corporate partner\u2019s taxable profits to reflect any successful reallocation of profits by HMRC.\u00a0 Provided the relevant conditions in s850E are satisfied, it should be possible for the relevant individual partner(s) to obtain the funds to pay their increased personal tax liability without adverse tax effects.<\/p>\n Pre-emptive action<\/strong><\/p>\n Hybrid partnerships and LLPs wishing to avoid the uncertainties of penal taxation under the new rules should consider appropriate restructuring.\u00a0 This might include moving to a full incorporation of the business or perhaps removing corporate partners and establishing a company owned by the partnership instead.<\/p>\n Peter Rayney In recent years, we have seen the growing use of so-called \u2018hybrid\u2019 partnership\/LLP structures.\u00a0 These \u2018hybrids\u2019 typically comprise a mixture of individual and corporate partners\/members (for simplicity, LLP members will also be referred to as partners). Although the use of … Continue reading \n
\n–\u00a0 \u00a0\u00a0\u00a0the services it provides to the partnership\/LLP<\/p>\n
\n10 February 2014<\/p>\n","protected":false},"excerpt":{"rendered":"