Partnerships - A simpler future?
I think we'd all agree that the tax rules applying to partnerships could be improved. A partnership is not an entity for most tax purposes and so its profits are taxable by reference to the individual partners. At best this creates extra admin; at worst, for example where there are complex profit sharing arrangements, it can cause real problems. And then we have capital gains. I can't think of any other area of tax where the rules are based on a HMRC statement - not actual legislation - issued almost 40 years ago.
All this could be about to change as the Office of Tax Simplification (the OTS) has been tasked with simplifying the rules. An in-depth review is underway with recommendations to follow in the Autumn and, hopefully, legislation in 2014/2015. All areas of partnership taxation will be considered, including administration and HMRC guidance, and there will be a focus on those areas of the rules which partnerships find "most difficult, costly and burdensome.
All good news then! And yet we have been here before, with the cash basis for small businesses and disincorporation (the process by which a business goes from being carried on by a company to be being carried on by a sole trader or partnership). In both cases, the OTS made reasonable and informed recommendations which would have resulted in simpler tax rules. However, those recommendations were watered down by the Government and if, anything, the changes have only made the rules more complex.
Let's hope that lessons have been learned and that partnership taxation will be simpler in the future.