• Partnership Taxation
  • December 6, 2013
  • Law Firm: Withers Bergman LLP - New Haven Office
  • The government has sent out warning signals on misuse of partnership rules to avoid national insurance contributions (i.e. by promoting employees to junior partnership) and the manipulation of profit or loss allocations by some partnerships to achieve a tax advantage.

    Exactly how HMRC plans to prevent the manipulation of profit allocation is unclear. The perceived mischief is that profits are allocated to partners with lower rates of tax, usually a corporate, either providing for deferral, or allowing for a later reallocation of those profits to other partners, who would have paid higher rates of tax had they received the allocations directly.

    There are disguised dividend rules in the UK, but these are usually circumvented by holding the corporate partners through offshore purpose trusts. So these rules could be tightened. However, our guess is that new rules will track the 'disguised remuneration' rules from 2011 and introduce a concept whereby profits allocated to a corporate partner but notionally earmarked for a future distribution to another partner, either by way of dividend or capital reallocation, will be immediately taxed in the hands of that individual.