In the Chancellor’s Budget speech on 20 March, George Osborne announced that he wanted to bring in new legislation ‘to stop the abuse of partnership rules’. HM Revenue & Customs have now issued a consultation document setting out the proposed changes to the tax rules on partnerships, with the intention that the changes will take effect from 6 April 2014. The proposals will result in a crackdown on GP partnerships that include a corporate member.
Q. We have a separate company for our non-NHS income. Will we be affected?
No, these proposed rules do not affect ‘ordinary’ companies. They only impact on partnerships where one of the partners is a company.
Q. Why have some GP partnerships used corporate partners?
The idea behind having a corporate partner, typically a company limited by shares in which the shareholders are the other partners, was to enable profits to be diverted through the company to reduce partners’ income tax bills. While the company would pay corporation tax on its profit share this would only be at 20%. The partners would then at some later stage receive dividends from the company, or sell their shares in the company on retirement.
This could be particularly effective if the partner’s profits would take them into the 60% tax band. By diverting some profits to the corporate partner this could be avoided and the profits taken in a later year.
It was also used as a method of building up working capital within the practice, while paying tax at only 20% instead of 40%.
Q. If this was such a good idea, why weren’t all practices using a corporate partner?
Firstly, a partnership with a corporate member was prohibited from holding a GMS contract, so it was only available for partnerships holding PMS or APMS contracts.
The potential tax savings also had to be weighed up against the administrative complexities and additional costs of operating the corporate partner.
Finally, some GPs were uncomfortable with this more aggressive tax planning in the absence of any other commercial justification for creating a company.
Q. What changes does the Government intend to make?
There are two main areas covered in the consultation document:
- Action to counter the manipulation of profit and loss allocations
- Removing the presumption of self-employment for fixed share partners in LLPs
Regards the first area, where a profit sharing arrangement has been put in place, the main purpose of which is to obtain an income tax advantage, then the profit allocated to the corporate member will be reallocated to the other partners. While the profits will still legally belong to the company, the partners will pay income tax on their own profits, plus their share of profits allocated to the company.
Regards the second area, removing the presumption of self-employment for fixed share partners in LLPs is unlikely to be relevant for GP partnerships, as they do not operate as LLPs because this prevents them offering membership of the NHS Pension Scheme to their staff.
However, it is worth noting that partners in LLPs who have a fixed share of profits and are not exposed to any significant economic risk will be treated as employees. Whether this rule will be extended to apply to all partnerships remains to be seen. This might then affect, for example, practice manager partners who receive a fixed profit share.
Q. What action should I take?
If you are a PMS practice with a corporate member in your partnership, you should seek advice from your tax advisor. You may wish to take action before the new rules come into effect on 6 April 2014.
Luke Bennett is a partner at Francis Clark LLP, who are members of the Association of Independent Specialist Medical Accountants