Budget 2013: partnership profit under scrutiny

Partnership profit sharing is to come under closer scrutiny with the launch of a government consultation next week.

Part of yesterday’s Budget, this is expected to focus on professional limited liability partnerships, such as lawyers, accountants and architects, but advisers fear that farm businesses may be drawn into a net that was never designed to catch them. The consultation will also consider the allocation of profits to corporate partners.

The Budget included a raft of measures under what are known as the government’s general anti-avoidance rules (GAAR), designed to focus on aggressive tax avoidance schemes. The full detail has yet to emerge, but it could affect several aspects of legitimate business planning undertaken by farmers.

“We will await the consultation document with interest as it might provide one of the biggest changes to the taxation of farm businesses for many years,” said Rob Hitch of Cumbria-based accountant Dodd & Co.

Partnerships are a flexible tax structure for farming families, allowing profits to be shared as partners agree. Allocating profits to a corporate partner or an elderly partner to avoid National Insurance could achieve significant tax savings, said Mr Hitch.

“This has been even more evident with tax credits as young families have restricted profits to claim tax credits and elderly/company partners have shared profits and paid reduced rates of tax.

“This is particularly prevalent in family businesses owned by several generations, which farming businesses almost always are. Coupled with the IHT [inheritance tax] changes announced I can’t help feeling that this wasn’t the best budget for farmers.”

The IHT measures proposed initially appeared to be aimed at artificial tax avoidance, but there was a potential impact for farmers, said NFU chief taxation adviser Michael Parker.

This would affect loans that are used to purchase assets qualifying for agricultural property relief or business property relief, but which are secured against assets that do not qualify for the relief, effectively reducing the IHT bill.

“At the moment, the loan is treated as reducing the value of the asset it is secured against, while this [Budget proposal] suggests that in future the loan will reduce the value of the asset that has been purchased.”

Mr Hitch said there was a real fear within the tax profession that the new GAAR may actually struggle to catch its intended target and, more worryingly, it may affect traditional tax planning areas, which are generally viewed as being acceptable.

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