Partnership problems?

THE 2013 Budget is behind us, but the Government is currently consulting on measures for next year’s Finance Act.

If you operate your business through a partnership or limited liability partnership (LLP) it might be wise to lift the phone to your accountant to ask if any of the proposals should concern you.

The Government appears to be gunning for arrangements where partnership structures incorporate limited companies as partners.

There are many good commercial reasons for adopting such a structure, but over recent years the potential for saving tax has been a significant factor in persuading some partnerships to go down this route.

In some cases the purported tax savings are in fact very limited and the practical consequences of adopting such a structure can cause serious practical problems when partners join or retire.

I have always taken the view that the more complicated you make the structure, the more it is likely at some point to need changing, either for practical reasons or because a change in the law will render it ineffective.

I suspect that over the next year or two we will see some complex partnership structures being unravelled.

The Government is not just looking at partnership structures designed to tax profits at a lower rate, however, but at other situations such as where a company partner lends money back to the business.

The new tax consequences of some such arrangements could well make them costly and inefficient.

The Government is also targeting LLPs and challenging the presumption that LLP partners are automatically self-employed.

In the consultation the Government is at pains to say that it is not seeking to attack genuine commercial arrangements, LLPs that are to all intents and purposes (other than having limited liability) akin to ‘traditional’ partnerships or the kind of profit sharing arrangements that exist in small family partnerships. These are welcome sentiments, but as anyone who advises on tax will tell you, final legislation does not always reflect such reassurances and it is left to HMRC to only use the law as ministers intended. Personally I think it is better for the legislation itself to contain the necessary safeguards.

So should business partnerships be losing sleep over any of this? Not necessarily, but if you operate through an LLP or have a partnership structure that includes a company you should talk to your tax advisers to find out if you might be affected.

*Paul Aplin OBE is a tax partner with A C Mole & Sons and chairman of the Technical Committee of the Institute of Chartered Accountants in England & Wales Tax Faculty; you can follow him on Twitter @PaulAplinOnTax. He and fellow tax partners Amanda Gunter and Paul Kingdom can be contacted on 01823-624450.