Farming partnerships that include a mix of individual members and companies or trustees should be aware of new anti-avoidance tax rules.
Draft legislation, which will form part the Finance Bill 2014, seeks to target tax-motivated arrangements involving mixed partnerships, warns accountant Old Mill. This could affect profit-sharing agreements whereby partners aim to minimise individual tax bills.
“Many farmers have a corporate structure which allows them to take advantage of lower tax rates,” says Anne Gardner-Thorpe, tax manager at Old Mill. “But where that company is also part of a partnership, businesses could find themselves with markedly higher tax bills.”
In many cases, individual partners have reduced their own income tax liability by diverting partnership profits to a non-individual partner – typically a company or trustee, which pays a lower rate of tax on its profit share, says Miss Gardner-Thorpe. “Broadly, this draft legislation seeks to override these profit sharing agreements, so that the profit allocated to the non-individual member is taxed on those individual partners who stand to benefit from the non-individual’s profit.”
For example, a farming partnership with a taxable profit of £40,000 is split equally between three individual partners and a company, solely held by the same individual partners. The company would usually pay tax at 20% on its profits, while higher rate individual taxpayers would pay tax at 40%. Under the new proposals, the profit share allocated to the company will be re-attributed to those shareholders who are also individual members of the partnership.
The draft legislation also tackles situations where profits allocated to a non-individual partner actually represent services that have been performed by a person who is not a partner, says Miss Gardner-Thorpe. “Where it would be reasonable to assume that the person would have been a partner but for the inclusion of the non-individual member, tax will be levied on the individual, not the corporate member.”
The second element of the legislation seeks to prevent individual partners from using partnership losses to reduce their personal tax liability through securing certain loss reliefs.
“Partnerships are traditionally the most common business structure for farming families, many of which also include a company partner,” says Miss Gardner-Thorpe. “Although the legislation is designed to catch tax-motivated arrangements, now is a good time to review any business structures that might be affected.”
The legislation is due to come into force from April, and will apply to profits generated from April 2014 – although the anti-avoidance measures have already come into effect, she adds. “That does not leave long to make alternative arrangements. It is imperative that farmers review their business structure now, to ensure it is suitable for their circumstances, and that it will not fall foul of the new legislation.”