Partnership tax; beware: disguised employment and profit and loss allocation under review.

In the 2013 Budget the Government announced that it would consult on these two areas: 

removing the presumption of self-employment for some LLP members, where employment relationships are disguised through LLPs, and 

countering the manipulation of profit and loss allocations by LLPs and other partnerships to achieve an advantage.

Those likely to be affected are:

1. members of LLPs who work for the LLP on terms which are akin to employment and
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2. members of LLPs and other partnerships where some members are chargeable to income tax and others are not where:
   • a main purpose of the profit-sharing arrangement is to secure an income tax advantage or
   • a main purpose is to allocate partnership loss to a partner with a view to obtaining a reduction of tax liability though income tax or capital gains tax reliefs. 

Profit and loss allocation schemes also cover the scenario where one partner transfers profits to another as a result of a revised allocation of profits in return for payment which is not taxed as income.

HMRC is seeking responses to its proposals following which the changes will be introduced in the Finance Bill 2014 and the National Insurance Contributions Bill. The changes will take effect from 6 April 2014.

The consultation closes on 9 August 2013.  

For more information see: A review of two aspects of the tax rules on partnerships.