Partnerships under pressure: Part 2

Partnerships under pressure: Part 2


Author: Niall Murphy

This is the second of two looks at new measures being introduced by the Revenue to crack down on what it perceives as the use of partnerships for tax avoidance purposes.

In all cases, they counteract what have been reasonably standard and long-term planning measures.

Here we look at the proposed new measures.

Disguised remuneration

This is specifically targeted at Limited Liability Partnerships (LLPs). New legislation will remove the presumption that all members of a LLP are self-employed. The presumption means that salaried partners, fixed-profit partners and persons who would, under normal tests, be regarded as employees are treated as self-employed.

The proposed legislation will remove this presumption and replace it with a series of factors to be taken into account to determine whether a member is genuinely self-employed or not.

There are two sets of tests. The first applies the tests set out in the Employment Status Manual to determine whether someone is an employee or self-employed. If these are inconclusive there is then an economic substance test which seeks to determine whether the individual has a real economic risk in the business. Whilst it may be possible to satisfy the first by a combination of drafting and actual working conditions, the second is likely to be more difficult to satisfy in practice.

Profit and Loss Allocation Schemes

The legislation is aimed at mixed partnerships; ie partnerships which have one or more individual and corporate partners.

The perceived mischiefs are:

  • Profits being allocated to corporates which are taxed at the lower corporation tax rate, rather than the higher income tax rate, where there is a connection between the individual and the corporate. Typically, this would involve the individual being able to access the profits in the corporate at a lower rate later on, for example by selling shares in the corporate and claiming entrepreneurs' relief.
  • Losses being allocated to individuals who are relieved at a higher rate than if the losses were allocated to the corporate member.
  • Partnership members with differing tax attributes. An example is where a member (transferee member) contributes capital to the partnership or makes a payment to another member (transferor member) in return for receiving a new or increased share of the profits. The transferor member is either not taxed at all or taxed at a much lower rate than the transferee member, whether as a result of its residence or tax status.

In the case of profit allocations, part of the profits allocated to corporate members will be reallocated to members within the charge to income tax on a just and reasonable basis. Where loss schemes are involved, the proposal is that no tax relief will be given for the advantaged person's partnership loss for the relevant period.

In the case of partnerships with different tax attributes the payment received will be treated for tax purposes as income of the transferor member.


It seems clear that partnerships are going to have to review carefully any arrangements that potentially fall within these schemes.

The draft legislation is being published with the Autumn Statement, in early December, at which point it should be possible to determine exactly how the legislation will impact on individual partnerships.