Due to perceived tax avoidance involving individuals in mixed member partnerships, as part of his Autumn Statement delivered in front of parliament early last month Chancellor of the Exchequer George Osborne outlined new legislation to be placed into effect from April 2014, set forward to tax the profit split in these partnerships more evenly.
Speaking via the Autumn Statement itself, George Osborne states that, “the government remains committed to ensuring that those with the most pay the most,” which includes , “…acting to prevent large professional partnerships and wealthy individuals concentrated in private equity from abusing the rules on compensating adjustments in the transfer pricing code.”
Why there are New Tax Rules for Mixed Member Partnerships
The reason for these new rules is thought to be to bring an end to how easy it’s been for individuals in mixed member partnerships who also own shares in a company within the same partnership to organise the partnership structure in order to allocate greater profits to the company.
As tax rates are lower for company income, an individual in a mixed partnership of this type could effectively reduce the amount of higher-rate tax they paid significantly by only paying personal income tax on a small amount of the partnership’s profits, while receiving income taxed at a much lower rate via their company shares. It’s also suggested that many individuals in this situation have been gifting company shares to their spouse so to take advantage of their spouse’s personal allowance – reducing the overall tax paid even further.
The New Legislation
Special provisions regarding the new legislation came into effect on 5 December 2013, the date the Chancellor gave his Autumn Statement to parliament, so to prevent any special avoidance tactics before the full legislation comes into force on 6 April 2014.
The new legislation is set to reallocate excessive profits that have been allocated to a non-individual partner (such as a company) of a mixed partnership to an individual partner, when all of the following conditions can be met:
- The non-individual partner has a share in the firm’s profits;
- The non-individual’s share is excessive;
- An individual partner can enjoy the non-individual’s share, or there are deferred profit arrangements in place;
- It is reasonable to believe that whole or part of the non-individual’s share is attributable to that power or arrangements.
The exact specifics of these rules are difficult to place a direct finger on as the new legislation will allow HMRC to work within relatively objective parameters to decide if it is reasonable to believe that the effect (not the purpose) of a mixed member partnership’s profit splitting is to reduce the payable tax across all members.
For this reason, if you’re in a mixed member partnership, particularly a professional firm or a private equity firm, it’s recommended that you review the way in which you separate out your profits extremely carefully so to ensure you don’t succumb to the new rules come April.
The New Mixed Member Partnership Rules and You
To speak with a professional to study your current partnership structure to discover whether you’re vulnerable to the new rules, or for any other reason, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.
This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.