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‘Like a comfortable old shoe’ – HMRC review attempts to push reset button on its relationship with partnerships

City tax partners have long accused HM Revenue and Customs (HMRC) of unfairly treating all partnerships as tax avoidance vehicles but in a new report published last week, the government body appears to be taking steps to reset the relationship, albeit only shortly after announcing that salaried partners will be treated as having a ‘disguised salary’ and must be taxed as employees.

The review of partnerships by the Office of Tax Simplification found that more needs to be done to counter the feeling that the HMRC views them ‘as if they were exclusively avoidance vehicles’.

It adds: ‘Fundamentally, HMRC and the tax system generally needs to evolve a more supportive and constructive approach to partnerships. They represent 10 per cent of UK businesses; the very large partnerships are a major contributor to UK business and export earnings. Yet they are very much the poor relation in the way they are handled by HMRC and indeed regarded by government.’

The report finds that ‘demonstrating that partnerships are indeed viewed as “legitimate commercial structures and the majority do not…manipulate business profits”, may well help reassure relevant businesses and help develop better relationships and balance.

The one-size-fits-all approach adopted by the HMRC towards partnerships and in particular LLPs has led to City partners accusing the government body of lumping respectable law firms together with far riskier businesses.

As announced in the HMRC’s Autumn Statement 2013, the draft Finance Bill, which will come into effect in April this year, says that partners with less than 20% of their remuneration linked to the profits of the firm will be regarded as having a ‘disguised salary’ and subject to both income tax and national insurance in a move expected to add thousands of pounds onto firms’ tax bill.

At the time of that announcement, chair of Baker Tilly’s professional practices group George Bull said: ‘We are disappointed that HMRC has ignored many of our recommendations, in particular those that addressed commercial concerns.

‘In addition, HMRC has ignored profession-wide requests not to apply such a “broad brush” approach which has, as predicted, caught so many genuine partnership businesses using the structures to accumulate profits for internal investment. This now gives the partnership model a very real disadvantage in comparison to the traditional corporate model.’

Last week’s review of partnerships ended: ‘Our overall conclusion is that partnership tax works, but like a comfortable old shoe it is a little worn at the edges and may have a couple of holes coming through. In many ways there is a need for a variety of types of shoes.’