HMRC treats LLPs like 'avoidance vehicles' says OTS
22 Jan 2014
HMRC generally treats partnerships and LLPs in particular, as if they were exclusively avoidance vehicles, the authors of a report into partnership taxation were told, during their review of the rules affecting 420,000 business partnerships.
The report, published by the Office of Tax Simplification, also raised HMRC's stance on partnerships - and LLPs in particular -as 'one of the most sensitive issues'.
OTS researchers and authors - Roger Jones, Martin Gunson and Gareth Jones - said in their report: 'Echoes of this came in some of our meetings with HMRC staff, though at senior levels HMRC are categoric that this is not the case.
'The debate over the anti-avoidance provisions relating to partnerships (see the comments in our introductory chapter) may well have had a part to play in this, as they were clearly in the minds of many commentators. At the same time, the views expressed by partnerships and agents were deeply felt and were clearly long-held.
'There is a need for balance here and our point above about a more strategic approach to partnerships, in effect demonstrating that partnerships are indeed viewed as 'legitimate commercial structures and the majority do notmanipulate business profits', may well help reassure relevant businesses and help develop better relationships and balance,' the authors wrote.
The OTS said there is considerable scope for simplifying the tax rules for partnerships, after studying the rules affecting 420,000 business partnerships in the UK as part of its latest review to simplify the tax system.
In particular, the report found that the 'one size fits all' approach to the taxation of partnership creates complexities and burdens for small partnerships when compared to sole traders with similarly-sized businesses.
In addition, HMRC was found to have no particular coordination or support around its partnership work and its guidance was criticised for not being in one place.
'Partnerships currently cannot file their return online with free software, unlike other businesses. When taxes apply to partnerships they often involve special calculations, but HMRC does not currently have a single contact point where partnerships and their advisers can go for the specialist advice they require,' the report said.
Among the report's recommendations for 'quick fixes' are bringing together all HMRC's partnership guidance in one place, providing free filing software so partners can file their returns like other individuals and publishing a 'model partnership' agreement.
Longer term issues recommended by the OTS for further study include making late filing penalties fairer, simplifying how partners' personal expenses are accounted for and smoothing some of the tax tripwires partnerships face internationally. The OTS is also keen to reduce administrative burdens, for example, by doing away with partnership tax returns for small partnerships.
John Whiting, Tax Director of the Office of Tax Simplification, said: 'We have been struck by the number and variety of partnerships: some 10% of UK businesses with total annual turnover of £150bn, ranging from the classic two-person firm through medical partnerships up to the 'Big 4' accounting firms, but also including increasing numbers of 'City' investment arrangements. The tax rules try and cope with them all and whilst the system broadly works, it's creaking.'
Final details of the next stage of the review will now be agreed with Treasury Ministers and final recommendations will be reported ahead of Budget 2014.
The OTS interim report is available HERE