The Chancellor’s Autumn Statement in December included a focus on cracking down on ‘tax avoidance’.
A big part of this is a review of partnership tax law.
George Osborne said to the Commons “we will ensure that the tax advantages of partnerships are not abused”.
Partnerships are the most common business structure in the family farming sector, meaning many farming businesses will need to carefully consider their position in light of this.
A particular immediate impact is with ‘mixed partnerships’. Typically this means partnerships that contain a mix of individuals and limited companies. The ‘corporate partner’ pays a much lower rate of corporation tax; therefore, by channelling a portion of the profits into a ‘corporate partner’, the partnership reduces its liability for income tax and national insurance.
Draft legislation was published by HMRC in December that may reduce the future tax benefit of having limited companies as a partner in the farming partnership.
This structure has been a very efficient way to pay less tax on profits that need to be reinvested in the business as working capital.
Using a limited company owned by other family members can also be a useful way of passing on some of the family wealth without individual family members having to become partners in the business. However, HMRC believes that tax avoidance is being carried out and has drafted new rules to counteract this perceived abuse.
We have been studying these new rules and analysing how they may impact.
The rules have immediate effect but will not be retrospectively applied.
Many farming businesses have enjoyed the tax benefits up to now of having this partnership structure in place, but each affected farming business will need to consider practical ways of dealing with the new rules.
Continuing to allocate profits to the corporate partner will not be prohibited.
However, it is clear that future profit shares allocated to corporate members will have to be ‘reasonable’, taking into account the capital invested and services performed by thecompany.
Each business will have a different solution to this problem.
In cases where a reasonable amount of profit can still be allocated to the company, retaining the status quo may be the answer.
For those where the annual tax benefits will no longer be there, it may be time to take the company out of the partnership and either wind it up or use it for some other purpose.
Or you could consider alternative ways of using a limited company other than it being a partner in the partnership.
Given the current lower levels of prices for many farm outputs, the concern about paying tax may not be uppermost in many farmers’ minds, but planning to minimise tax when higher profits return needs to be put in place before the event to maximise the business options available.
There are a number of possible solutions that can allow the business to continue to minimise its taxes and even although these rules are still in draft, partnerships with “corporate partners” should review their position as soon as possible.
There still remain other ways of reducing taxes, such as pension contributions, timing of expenditure on repairs or qualifying plant and equipment, and introduction of other partners that should be considered along with the use of companies.
*Robin Dandie is head of agriculture at Johnston Carmichael and is based in the Forfar office.