Posted by Nick Day on 30 Jul 2014
Mixed Partnerships: Partnership Profit Allocation
The profits of mixed partnerships are taxable on each partner as if it is their own trading income. This means that individuals who are members of a partnership are taxed on their profit share at income tax rates of up to 45%, while corporate partners will be taxed on their profit share at corporation tax rates of up to 21%. Since partnerships have a wide discretion as to how partnership profits can be allocated, this significant variation in tax rate means that tax can often be saved by allocating a larger share of profit than may otherwise be appropriate to a corporate partner.
2014 Finance Act
The 2014 Finance Act, which has now received Royal Assent, contains legislation which may affect the amount of partnership profits that can be allocated for tax purposes to a corporate partner in a mixed partnership (a partnership with both corporate and human partners).
Under the new legislation, the maximum allocation allowed for tax purposes to a corporate partner may be limited to a market rate of interest on the capital investment made by the company and the market value of any goods or services provided by the company.
Where an individual partner has the “power to enjoy” the corporate partner’s profit, for example, if the individual has a shareholding in the corporate partner, any amounts in excess of the maximum allocation could be allocated personally to that individual. The profits would, therefore, be subject to income tax and class 4 National Insurance Contributions (NICs) instead of corporation tax, which could result in a significantly higher tax charge.
The “power to enjoy” the corporate partner’s profit is very broadly defined, so is likely to apply in many cases.
Contact Tax Innovations about Mixed Partnerships Tax
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