Pam Sayers highlights three key areas that could impact on the tax liability of partnerships, meriting a review of existing and future structures.

Proposed cap on income tax reliefs

A technical consultation was issued in July, proposing to cap relief at £50,000 or 25% of an individual's total income (depending on which is higher) on ten unlimited income tax reliefs from April 2013. These include:

  • trade and property loss relief against general income
  • early trade loss relief
  • post-cessation trade and property loss relief
  • qualifying loan interest relief.

If implemented, individuals with additional business activities may only be entitled to a restricted amount of relief, including overlap relief for retiring partners.

The potential restriction on qualifying loan interest is likely to affect those partners who borrow significant amounts for the partnership, where the combined results from all business activities mean the cap on relief applies. Partnerships previously using partner finance may need to increase borrowings from elsewhere. With draft legislation expected in December and limited time before implementation, it may be appropriate to review partnership structures and financing arrangements now.

Impact of transfer-pricing Requirements

Transfer pricing for UK transactions was originally introduced in 2004. It was intended to ensure that UK rules on transfer pricing applied both crossborder and within the UK to comply with fundamental EU freedoms. It is now thought that these freedoms might be met without applying transfer pricing to UK transactions and HMRC is considering the implications of any possible changes.

Transfer-pricing arrangements apply automatically to businesses which are not classified as SMEs (no more than 250 staff and either turnover or balance sheet total of less than £10m, although the latter can elect irrevocably for transfer-pricing arrangements to apply on all transactions). Where transfer-pricing arrangements do apply, transactions between connected parties must be on an arm's-length basis where one or both parties would otherwise obtain a potential UK tax advantage.

Some partnerships use a service company within their structure and this company recharges costs at a mark-up. If the transfer-pricing rules for UK transactions change, there could be implications concerning the effectiveness of partnerships operating under existing rules.

Discussions are still at an early stage, with the possibility of further consultation. This presents an ideal opportunity for businesses to review their related-party transactions.

HMRC taskforces tackle tax evasion, avoidance and fraud

HMRC recently issued a press release announcing the launch of new taskforces to tackle tax evasion, avoidance and fraud in a number of specific business sectors, including the London legal profession.

This is just one of several recent initiatives aimed at bringing the less compliant or more aggressive tax avoiders into line, including:

  • disclosure facilities for those previously evading ta
  • a proposed general anti-abuse rule
  • a proposed strengthening of various anti-avoidance provisions
  • some high-profile court successes against marketed tax-avoidance schemes.

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