Changes to the partnership tax rules and the impact on your business

Transcription

1 Changes to the partnership tax rules and the impact on your business Mike Hayes 10 December 2013

2 Starting point Consider the offensive structures The changes: Close company participator rules Transfer pricing Corporate members Salaried members What still works Incorporation of a partnership or LLP

3 Offensive structure - 1 Individual members Corporate member Passive? Loan LLP Trade

4 s455 CTA 2010 Applies: Where a close company Makes a loan to a participator or an associate of a participator Definitions? Company pays corporation tax on loan at 25% Provision for tax to be repaid as loan is repaid

5 s455 CTA 2010 There are also doubts about the application of [s455] to loans to a partnership whose members include the company itself. The loan cannot reasonably be viewed as a loan to the other partners. Previously did not apply to our structure

6 s455 CTA 2010 Loans advanced after 20 March 2013: An LLP or other partnership one or more of the partners in which is an individual who is: Planning: A participator in the company; or An associate of an individual who is a participator Advance monies as capital Undrawn profits? Trading balances

7 Offensive structure - 2 Individual members Corporate member Passive? One or more partners overdrawn Capital LLP Trade

8 Example Total Corporate member Suarez Sturridge Profit: 500, ,000 20,000 20,000 Capital account: B/Fwd. 100,000 34,000 33,000 33,000 Profit share 500, ,000 20,000 20,000 Drawings (300,000) (150,000) (150,000) C/Fwd. 300, ,000 (97,000) (97,000)

9 s464a Arrangements conferring benefit on participator A close company is at any time a party to tax avoidance arrangements, & As a result of those arrangements, a benefit is conferred (directly or indirectly) on an individual who is a participator/associate in the company, or Charge on company = 25% of value of benefit conferred

10 Planning Applies to arrangements to which a close company becomes a party on or after 20 March 2013 Part of the arrangements may have occurred earlier Profit sharing & drawings Reminder bed & breakfasting

11 Offensive structure - 3 Individual members Service company Engages staff Uncommerical charge to LLP LLP Trade

12 Example Service company LLP A/c profit Tax profit A/c profit Tax profit Profit before staff costs 1,500,000 1,500,000 Staff cost (1,000,000) Charge to LLP 1,000,000 0 (1,000,000) (1,000,000) Profit before transfer pricing Transfer pricing adjustment 10% , , ,000 (100,000) Revised profits 0 100, , ,000

13 Transfer pricing Mandatory for large companies Medium-sized enterprise: Staff headcount less than 250; and Either: Turnover not exceeding 50m; or Balance sheet total not exceeding 43m SMEs exempt unless they elect in Compensating adjustments

14 The change No draft legislation yet WEF 25 October 2013 Compensating adjustments will not be allowed Planning: SMEs: Election irrevocable Collapse structure Adjust actual price to arm s length price Large companies see above

15 Offensive structure - 3 Individual members Service company Engages staff Uncommerical charge to LLP LLP Trade

16 Offensive structure - 4 Individual members Corporate member Passive? Profit share covers drawings & tax Excess profits LLP Trade

17 Partnerships with mixed membership Applies to partnerships/llps with: Individual members Non individual members Confusing start date: Comes into force from 5 December 2013 A/C periods commencing on or after 6 April 2014 Straddling periods beginning before 6 April 2014 as though period falling on or after 6 April is a separate period of account

18 Offensive structure - 4 Individual member A Corporate member B Profit share covers drawings & tax Excess profits LLP Trade

19 Condition X Amounts representing A s deferred profit are included in B s profit share As a result A s profit share and taxable amount are lower than they would otherwise have been

20 Condition Y B s profit share exceeds the appropriate notional profit A has power to enjoy B s profit share It is reasonable to suppose that: All or part of B s profit share is attributable to A s power to enjoy; & Both A s profit share and the relevant tax amount are lower than they would have been in the absence of A s power to enjoy

21 Adjustment A s profit share increased by so much of B s share as it is reasonable to suppose is attributable to: A s deferred profit A s power to enjoy

22 Definitions Deferred profit - any remuneration or benefits or returns the provision of which to A has been deferred (conditional or otherwise) Power to enjoy A is connected with B; & Any of enjoyment conditions satisfied Appropriate notional profit appropriate notional return on capital & notional consideration for services

23 Definitions Notional return on capital Time value of money equal to B s contribution to the firm; and At a rate which is a commercial rate of interest; less Amount paid not included in B s profit share Notional consideration for services Arm s length price; less Amount paid not included in B s profit share

24 Definitions Relevant tax amount total amount of tax payable by A & B ignoring s740c

25 Offensive structure - 4 Individual member A Corporate member B Profit share covers drawings & tax Excess profits LLP Trade

26 .and there is more. If A provides services to the firm, but is not a partner, A is also caught if it is reasonable to suppose that A would have been but for the provisions of s850c If B makes a payment to A to reimburse for the extra tax it pays this is not treated as income for any purposes Likewise reimbursement of extra profit share

27 Comment *^*³ *! Very widely drawn: Benefit Arrangements Just & reasonable Reasonable to suppose etc. Subjective commercial rate etc. Look at detailed conditions

28 Offensive structure - 4 Individual member A Corporate member B Profit share covers drawings & tax Excess profits LLP Trade

29 Planning Adjust profit shares in accordance with legislation Note additional profits taxable on A will reduce B s taxable profits But without reimbursement value still in B additional tax on dividend or winding up Collapse structure

30 Offensive structure - 5 Individual member A Bonus creates a loss for B Corporate member B LLP Trade Large bonus

31 Illustration Total profit Corporate member B A/C profit Tax profit Individual member - A A/C profit Tax profit Year 1 300, , ,000 50,000 50,000 Year 2 300, , ,000 50,000 50,000 Year 3 [300,000] Bonus to A 600, , ,000 Balance (300,000) (250,000) (250,000) (50,000) (50,000) Tax adjustment 250,000 (250,000) Total 900, , , , ,000

32 New rule Applies to trades, UK & overseas property businesses If A makes a loss a loss as a partner: A s loss arises wholly or partly Directly or indirectly; or Otherwise in connection with relevant tax avoidance arrangement No loss relief will be given to A But A has not made a loss!

33 New rule Profit skewing /bonus arrangements still work But it relies on large profits being apportioned to company in the first part of any bonus period Losses for 2014/15 (tax year) Eg: YE: 31 March 2015 YE: 30 April 2014 but apportionment for period starting on or after 6 April 2014

34 Offensive structure - 6 Equity members Individual member Fixed profit shares LLP Trade

35 Pre-LLPs Stekel v Ellice [1973] 1 WLR 191 It was acknowledged that it was possible for a partner in a partnership to be an employee for tax purposes: Fixed profit shares No Capital Limited or no voting Not a bank signatory

36 LLPs Tax legislation provided that a member of an LLP would be treated as self-employed Result making employees members on fairly similar terms to employment to save employer s NIC

37 Disguised employment From 6 April 2014 A salaried member of an LLP is an individual member of the LLP who, on the assumption that the LLP is carried on as a partnership by two or more members of the LLP, would be regarded as employed by that partnership.

38 Disguised employment A salaried member of an LLP includes an individual member of the LLP who does not meet the first condition but who: has no economic risk (loss of capital or repayment of drawings) in the event that the LLP makes a loss or is wound up; is not entitled to a share of the profits; and Is not entitled to a share of any surplus assets on a winding-up.

39 Insignificant risk What is insignificant will be determined in the light of all the circumstances and by reference to the overall package of benefits derived from the partnership agreement In line with normal practice, an entitlement to share in the profits that for practical purposes would never be more than 5% of any fixed entitlement would be unlikely to be regarded by HMRC as significant

40 Planning Wait until draft Finance Bill Likely need to amend status of existing salaried members - consider: Variable profit share Capital & capital profits Voting Or pay the NIC! Employment law issues?

41 LLP changes generally Projected additional tax from all measures for 2014/15 to 2018/19: Budget billion Autumn Statement billion 3+ month window to do some planning

42 Why not incorporate? Effective tax rates 2015/16: Small company Marginal company Large company Salary 53.43% 53.43% 53.43% Dividend 44.44% 44.44% 44.44% Interest or rent 45% 45% 45% Self employment 47%

43 Example: LLP has net tangible assets of 1M Goodwill (not in accounts) valued at 2M Process: Form company & capitalise to appropriate level Some time later sell assets to company at MV - 3M Consideration left on loan account

44 Benefits Entrepreneurs relief available so that tax on gain is only 200K Loan account can be drawn down and salaries kept within say basic rate band Possible corporation tax deduction for goodwill if business commenced on or after 1 April 2002 Profits taxed at low corporation tax rates Thereafter salary + dividends

45 But.. HMRC might not agree MV of goodwill Valuation too extravagant? Personal goodwill? As profits accrue - shares will acquire value Protection of SP D12 will be lost Employment related securities issues Incoming & retiring partners Generally more difficult for professional firms

46 And finally.. any questions?

47 Contact details Office: Direct line: Mobile: Web:

48 Disclaimer This presentation covers topics only in general terms and are intended to give a wide audience, an outline understanding of issues in tax, and therefore cannot be relied on to cover specific situations; applications of the principles set out will depend on the particular circumstances involved. Furthermore, responses given in the seminar to questions are based on only an outline understanding of the facts and circumstances of the cases and therefore do not form an appropriate substitute for considered specific advice tailored to your circumstances. We recommend that you obtain professional advice before acting or refraining from acting on any of its contents. We would be pleased to advice you on the application of the principles outlined in this presentation to your specific circumstances, but in the absence of such specific advice cannot be responsible or liable.