Schedule 13 of the Finance Act 2014 will introduce a raft of rules pertaining to partnerships. The ‘salaried members’ and ‘mixed partnership’ rules are the most far-reaching of these (but by no means the only!). The salaried members rules are domestic in scope, whereas the mixed partnership rules can apply to offshore entities too.
My concern is that many parties appear to be reacting in knee-jerk style by unravelling existing mixed structures. There are two primary reasons why this ought not to be done without careful deliberation.
First, because the new rules are not as draconian as might first appear. Through Conditions X and Y, the legislator is essentially attempting to provide a barometer through which he assesses whether the profits accruing to the corporate member are such as one might expect in circumstances where the parties are acting at arm’s length terms. To the extent that these conditions are not satisfied, profits arising to the corporate member are relocated to individual members. Whilst Conditions X and Y appear to me to provide a sufficient measure of leeway to allow for real-world practices, the Examples provided by HMRC in the concomitant guidance indicate (in my opinion, misleadingly) that the rules are far stricter than they in fact are. (Examples in executive Guidance perhaps not surprisingly tend to present a stricter view of legislation and a ready example which comes to mind is the admission in the GAAR Part D Guidance that the use of ISAs would not be viewed as an unreasonable course of action!)
Second, because to unravel existing structures with a view to addressing the mixed partnership provisions would result in an irrevocable, complete and possibly negligent forfeiture of the valuable pre-commencement GAAR protection.
There are other points arising too – those pertaining to construction and others pertaining to facts which might very reasonably be taken to preclude an application of these rules. In light of all these, I would recommend a fine-tuning of the arrangements rather than a re-structuring where possible.