Readers of our recent Legal Focus will be aware that the Government was planning to introduce new legislation setting out a strict formula, by which partnership profits and losses would be allocated between partners for tax purposes. The draft legislation dictated that the allocation for tax purposes would be based on the effective ratio that the commercial profits (as reported in the partnership/LLP accounts) are shared between the partners.
If introduced, this new rule would have taken away any flexibility for legal practices in allocating tax adjustments (i.e. items such as private motor expenses, health insurance costs etc) to specific partners or, as is the case for many practices, for fixed share partners to receive no share of the tax adjustments. The new rule was expected to be included in Finance Bill 2018, and to take effect for the 2018/19 tax year onwards for some practices, and from 2019/20 for others (dependent on the practice’s accounting date).
The Finance Bill has now been published and, in a victory for common sense, the Government has dropped this proposal entirely. We have spoken to HMRC to find out why the draft legislation was omitted from the Bill, and they confirmed that the change of heart arose because they realised it would catch many commercial arrangements that were not the target of the proposal, and they believe they already have sufficient tools at their disposal to combat the “mischievous uncommercial arrangements” that they are seeking to close down.
Given the changes partnership taxation has gone through in recent years, maintaining the status quo on profit allocations will be welcome news for many practices.