Partnerships with corporate members

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Last summer a consultation document was published setting the proposed counteraction by HMRC of artificial profit and loss allocation schemes involving partnerships and LLPs where some of the members are chargeable to income tax but others not. The measures were clearly intended to catch the situation where excessive profits are allocated to members who are limited companies where those profits would be taxed at a much lower rate than that payable by individual members. Individuals potentially pay tax on their share of profits up to 45% (plus 2% class 4 NICs) whereas company profits are taxed at 21%, and can be as low as only 20%.

Legislation in the latest Finance Bill will enact the changes which apply with effect from 6 April 2014. The legislation determines the maximum profit share allocated to non-individuals (in the main corporate members) and requires the excess profit share to be reallocated to individual members. The anti-avoidance however only applies where there is a connection between the individual and the non-individual (corporate) member. The amount of profit allocated to the corporate member in future will be limited to a reward for services provided, if any, plus a return on its capital at a commercial rate of interest (not a lot).

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