1. Partnerships: A review of two aspects of the tax rules Consultation open meeting 21 June 2013

2. Partnerships review consultation open meeting 21.6.13 | 25/11/2014 | 2 Purpose Explain the problem & Government objectives Outline the consultation process Brief introduction to consultation proposals Gather views and suggestions to inform detailed design

3. Partnerships review consultation open meeting 21.6.13 | 25/11/2014 | 3 Agenda Introduction 1.Context 2.Government Objectives 3. Timeline & Consultation Process 4. The Consultation Proposals – Disguised Employment 5. Questions & Discussion Break (Tea/Coffee) 6.The Consultation Proposals – Profit & Loss Allocation Schemes 7.Questions & Discussion

4. Partnerships review consultation open meeting 21.6.13 | 25/11/2014 | 4 What’s the problem? Commercial flexibility Inconsistency & unfairness Regulatory position Legitimate commercial structures Tax avoidance

5. Partnerships review consultation open meeting 21.6.13 | 25/11/2014 | 5 Government Objectives Restoring level playing field Prevent unfairness and market distortion Stopping partnerships – not just Limited Liability Partnerships - from being used in ways that can give rise to certain tax advantages

6. Partnerships review consultation open meeting 21.6.13 | 25/11/2014 | 6 Consultation – general approach A starting point for making the changes, not an end point. Certain fixed parameters, but we don’t have all the answers If you have a better idea, let’s hear it

7. Partnerships review consultation open meeting 21.6.13 | 25/11/2014 | 7 Indicative Timeline 2013 Draft FB2014 legislation Informal consultation Working on detailed policy and legislative design Formal consultation Budget Announcement Sept- NICs Bill Autumn Statement Summary of responses FB14 Comment period May – August Oct – Nov Draft Technical Guidance Informal consultation

8. Partnerships review consultation open meeting 21.6.13 | 25/11/2014 | 8 Indicative Timeline 2014 Effective Date = 6 April 14 Informal consultation Working on detailed guidance and implementation March July Implementation Royal Assent on FA 2014 April Budget? Evaluation Final Technical Guidance

9. Partnerships review consultation open meeting 21.6.13 | 25/11/2014 | 9 Consultation Proposals

10. Partnerships review consultation open meeting 21.6.13 | 25/11/2014 | 10 Part 1 – Disguised Employment Current tax rules Limited Liability Partnership (LLP) members are taxed as if they are partners in a partnership established under Partnership Act 1890 (traditional partnership) even if they are engaged on terms closer to those of employees. Problem In the absence of the LLP Act 2000, the LLP would be taxed as a company. Under the LLP Act, individual members are taxed as self-employed partners and company members are liable to corporation tax. Avoidance: low paid workers taken on as LLP members giving rise to loss of employment benefits and protection. Unintended unfairness: high paid workers benefit from self-employed status leading to loss of employment taxes payable.

11. Partnerships review consultation open meeting 21.6.13 | 25/11/2014 | 11 Change Proposals First Condition Is the LLP member a salaried member by reference to normal tests as set out in the Employment Status Manual published on the HMRC website? Second Condition No (significant) economic risk Not entitled to a share of profits; and Not entitled to a share of any surplus assets on a winding up Facts Salaried Member? Any issue to determine contract of service Second Condition

12. Partnerships review consultation open meeting 21.6.13 | 25/11/2014 | 12 Questions? Coffee

13. Partnerships review consultation open meeting 21.6.13 | 25/11/2014 | 13 Part 2 – Profit & Loss Allocation Schemes Current tax rules Under partnership law, it is not necessary for profit sharing ratios to be in proportion to contributions, effort or capital, to be the same from year to year, or for profits and losses to be shared in the same proportions. This flexibility is available for all partnerships not just LLPs. Problem Tax advantages arise from increasing use of this flexibility. Mixed member partnerships: profits and losses Different tax attributes.

14. Partnerships review consultation open meeting 21.6.13 | 25/11/2014 | 14 Profit & Loss Allocation Schemes: Change Proposals (A) Mixed member partnershipsProposals cover working capital and profit deferral arrangements – but we are open to ideas of how to address the issues of profits never received (for example, consultation question 10), regulatory constraints etc without giving rise to tax avoidance or creating excessive administrative burden. Profit ConditionExamine the economic connection between the members not charged to income tax and those within the charge. Apply the ‘main purpose’ test to determine if the charge to income tax should be allocated back to the member within the charge. Loss ConditionStop income tax or capital gains relief subject to the main purpose text. (B) Different tax attributesApply the correct tax treatment by treating the payment received as the income of the ‘transferor’ member or connected person, chargeable in the same way and to the same extent as that in which the relevant profits would have been.

15. Partnerships review consultation open meeting 21.6.13 | 25/11/2014 | 15 Questions?

16. Partnerships review consultation open meeting 21.6.13 | 25/11/2014 | 16 Thank you Please send further enquiries and comments to By email: partnership.review@hmrc.gsi.gov.uk By post: Partnerships Review Consultation c/o Tax Administration Policy Team, HM Revenue & Customs, 1C/06, First Floor, 100 Parliament Street, SW1A 2BQ