Summary

A number of measures were announced at the time of the Budget on 20 March 2013 that affect many businesses involving LLPs and partnerships.

  • Spring 2013 consultation on the use of partnerships for avoidance in the areas of disguised employment relationships and manipulation of profit/loss allocations.
  • Review on simplification of partnership taxation.
  • Changes to the close company loan to participator anti-avoidance rules. It is to be hoped that the changes arising from these announcements will not affect genuine commercial arrangements used by LLPs and partnerships. However it will be desirable for all firms to review their individual arrangements.

As a matter of urgency all loans by close companies that involve a partnership should also be reviewed as legislation aimed at avoidance in this area is effective from 20 March 2013. A close company is one that is controlled by five or fewer participators (and their associates), or by participators who are directors (subject to some exceptions).

Spring 2013 consultation

The two areas highlighted on 20 March for consultation in the spring are: (i) the removal of the presumption of self employment for LLP members together with the use of LLPs to disguise employment relationships and; (ii) the manipulation of profit/loss allocations by partnerships involving companies and /or trusts or other vehicles.

The consultation may have been initiated as a result of the increasing mixed use of corporates and LLPs in business structures, but also because of the Legal Services Act 2007 coming into force in October 2011, and the difference in tax rates applicable to profits taxed within a corporate and those taxed within an LLP or partnership structure.

Office of tax simplification (OTS) review of partnerships

In addition, the government has asked the OTS to review ways to simplify the taxation of partnerships and more focused consultation will take place following an initial scoping exercise. If changes are found to be necessary, this will be the subject of a future Finance Bill.

There are a number of areas around the administration of partnership tax issues and disputes that would benefit from improvement. Clarification on the tax transparency aspects of partnerships for a range of taxes and reliefs may also be an area for discussion.

Close company loans to participators

Subject to certain exceptions, the close company loan to participator rules operate to charge the company lender an amount as if it were corporation tax. The amount payable is equivalent to 25% of the amount of a loan or advance made to an individual, or a company receiving a loan or advance in a fiduciary or representative capacity (the borrowers here are termed 'relevant persons'), where either are participators or associates of such participators. Relief from the requirement to pay the amount equivalent to corporation tax (or the repayment of that amount) is available on a claim where the loan or advance is repaid or the debt is released or written off.

The provisions could also apply where an intermediary person other than the original close company, makes a payment or transfer to an individual or company participator.

Measures effective from 20 March 2013

Three changes to the close company loan to participator rules are proposed to deal with avoidance in this area, and which are effective from 20 March 2013:

  • The rules will apply where the loan is made to any form of partnership in which a participator (or their associate) who is a 'relevant person', is a partner.
  • The rules will apply to arrangements where value is extracted from a close company and a benefit is conferred (directly or indirectly) on an individual (or their associate) who is a participator in the close company.
  • There will be a 30 day rule to deny relief for loans repaid where the amounts repaid and redrawn exceed £5,000. Even where the 30 day rule does not apply, if the amounts outstanding are £15,000 or more at the time of repayment, and there is an intention to redraw an amount from the close company, the relief arising from the repayment will be denied.

Further consultation on structure and operation of tax charge on loans to Participators

On 20 March 2013 the Government announced it would consult later in 2013 on the structure and operation of the tax charge on loans from close companies to their participators. If legislation is found to be needed it will be included in Finance Bill 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.