As part of a wider review of UK partnership taxation law, the UK Government published a consultation document on 20 May of this year, as noted in our earlier memorandum on the same topic (see our memorandum on “Proposed Changes to UK Tax Treatment of Partnerships and LLPs” of 24 May 2013). Following this consultation, as part of its Autumn Statement on 5 December 2013, the UK Government published new legislation to address the way in which some mixed member partnerships were being operated so as to allocate profits and losses according to partners‟ individual tax circumstances, generally through arbitrage of different tax rates (the top rate of income tax for an individual is currently 45%, while the rate of corporation tax is currently 23%). The types of partnerships likely to be affected are large professional partnerships or those in the alternative investment fund manager sector, typically hedge funds.
In summary, the new rules, which have immediate effect, operate so that profits allocated to a non-individual (e.g. corporate) partner (B) in such a mixed member partnership will be reallocated to an individual partner (A) if B has an excessive share of the partnership's profit. This can be either because (i) some of A‟s deferred profit is included in B‟s profit share or (ii) because B‟s profit share exceeds the appropriate “notional profit” (broadly, a commercial rate of interest on capital invested plus an arm’s length reward for services supplied to the partnership) and A has the power to enjoy that income, for example by being a controlling shareholder in B.
In addition, any non-partner individual who personally performs services for a partnership will be treated as a partner and subject to income tax on his or her „deemed‟ profit share, being the amount of the non-individual partner’s share that is attributable to either (a) the individual’s deferred profit or (b) the excess appropriate “notional profit” that the individual has the power to enjoy, as determined on a just and reasonable basis.
The new legislation will also ensure that an individual partner will not be entitled to income tax relief or capital gains tax relief for partnership losses if the loss arises directly or indirectly, or otherwise in connection with, relevant tax avoidance arrangements (meaning, broadly, arrangements with a main purpose of securing that the losses of a trade are allocated to that individual partner, rather than a non-individual partner).
The legislation will be included in Finance Bill 2014, with the profit reallocation measures effective immediately (from 5 December 2013), with periods that straddle 6 April 2014 being treated as two separate periods of account. The loss relief disallowance measures will be effective for losses made in the tax year 2014-15 and subsequent tax years, with a time-based apportionment for losses arising in periods of account which straddle 6 April 2014.
The Government has not yet introduced legislation to address either the UK tax treatment of certain LLP members as deemed employees or, in the case of AIFM partnerships, the alignment of a partner’s income tax and NICs treatment with the remuneration deferral requirement under the AIFM Remuneration Code (for further details on these topics, see our earlier memo of 21 October 2013 on “Proposed Changes to UK Tax Treatment of Partnerships and LLPs: Further Update”). It is expected that such new legislation will take effect from 6 April 2014.