The Government announced at the Autumn Statement last year new legislation regarding ‘mixed partnerships’. These are partnerships which are made up of individuals and, generally, a company or ‘Corporate Partner’ and have been popular and flexible structures that provide the benefits of both a partnership and an incorporated entity.
Legislation was introduced on 5 December 2013 and the main changes are set to apply from 6 April 2014. Our Tax Consultancy Team have reviewed the legislation in detail and considered the likely impact on our Corporate Partner Structures.
The legislation was aimed at aggressive structures where there tends to be no commercial relationship in existence between the company and the partnership. Unfortunately it has been drafted so broadly it will impact even those with commercial substance. The new legislation seeks to limit the amount of profits transferred to the corporate partner so that it receives a commercial return only for the activities it undertakes on behalf of the partnership. However, this does mean that a corporate entity can still benefit from a return for these activities.
Profits can still be allocated to the company on the following basis:
Interest payments can be made in respect of the capital the company (and the other partners) has invested in the partnership. The interest rate must be commercial and so the rate will differ from business to business.
Payment for the provision of plant & machinery. Where the company provides plant and machinery to the partnership to use in its trade then the company can charge for providing this.
Staff costs –where staff salaries are paid by the company then it is possible to charge an uplift on these costs to the partnership for the provision of those staff.
For many businesses the best solution may just be to retain the structure, but there are alternative planning options including:
Remove the Corporate Partner Structure and wind up the company
This will bring the structure to an end and, where appropriate,company will benefit from the capital gains tax rate of 10% on the net assets in the company which will be distributed to the shareholders.
Care is required with professional partnerships (such as solicitors, architects, Chartered Surveyors and so on) as there is a risk of challenge from HMRC on the rate of tax applying on winding up so specific advice will be needed here.
Full or partial Incorporation
If there are two trades being run by the partnership it may be possible to transfer one of the trades into the company. If there is just one trade then full incorporation may be suitable.
Farmers owning land and businesses with property assets need to take care as full incorporation could be disadvantageous from an Inheritance Tax point of view. In addition to this any farmers who do not own land in their own right but are tenanted farmers must not enter into either a partial or full incorporation without first taking legal advice as they may find themselves in breach of their Tenancy Agreements.
It is clear the there is much to consider and we are in the process of reviewing and contacting all our clients with a Corporate Partner Structures to make sure they have the best structure going forwards from April.
