Corporate partnerships to reduce your business tax bill?
Corporate partnerships are becoming a very popular form of tax planning which can help to reduce the exposure of sole traders and individual partners to the 40% and 50% income tax rates.
Essentially, a sole trader or partner can establish a new company with which he then forms a partnership in relation to an existing business. The corporate partner can legitimately be allocated a significant part of the business profits; however, being a corporate, it will only be subject to corporation tax thereon (often only at the small profits rate of 20%). Profits can then potentially be subject to future extraction from the company at lower income tax / capital gains tax rates.
Despite the current popularity of this planning opportunity, clients should be aware that there are potentially four sets of specific ‘anti-avoidance’ provisions (namely the ‘transfer of income streams’, ‘sales of occupational income’, settlements’ and ‘transactions in securities’ legislation), together with general anti-avoidance case law, which HM Revenue & Customs (HMRC) could potentially invoke to challenge the tax effectiveness of these structures. There are also ‘employment-related security’ provisions which, if effective, could potentially convert capital gains arising on shares (taxable at only 10%) into employment income (taxable at 40% / 50%).
We can advise you on all of the tax aspects arising from this opportunity - in particular, on the potential tax savings available (as compared to the position on full incorporation); on the income tax, corporation tax, capitals gains tax, inheritance tax, VAT and transfer pricing aspects of the planning; on whether an LLP structure would be suitable; the contractual relationships between the various parties; the ‘anti-avoidance’ and ‘employment-related security’ provisions; and on the ‘income splitting’, legal and DOTAS (disclosure of tax avoidance schemes )status of the corporate structure.
We can also advise on the role of the corporate partner within the partnership, what activities it could undertake, its income and expenditure, and what it should contribute to the partnership.
And to ensure that you derive maximum benefit from your structure, we can advise on future corporate extraction opportunities.
Corporate partnership structures can only provide effective commercial and tax mitigation opportunities for a business if expert tax advice is taken before they are set-up.