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The replies to Query T16,032 in Taxation, 4 July 2002 ('The irresistible force of incorporation') seemed to dismiss the suggestion of a sole trader/partnership introducing a newly formed limited company as a partner as being too provocative. The idea is that the company as a general partner could be allocated a share (or all) of the profits, which could either be retained at the nil or 19 per cent rate and/or distributed as dividends free of National Insurance contributions. If rates, circumstances, etc.
The replies to Query T16,032 in Taxation, 4 July 2002 ('The irresistible force of incorporation') seemed to dismiss the suggestion of a sole trader/partnership introducing a newly formed limited company as a partner as being too provocative. The idea is that the company as a general partner could be allocated a share (or all) of the profits, which could either be retained at the nil or 19 per cent rate and/or distributed as dividends free of National Insurance contributions. If rates, circumstances, etc. changed, the company could simply be dissolved and the business continue as before, thus avoiding the upheaval of incorporating and disincorporating.
However, at a recent seminar it was suggested that the case of Newstead v Frost [1980] STC 123 provides authority for the tax effectiveness of a sole trader entering into a partnership with a limited company. We are looking to do this in our own practice with the sole purpose of avoiding Class 4 National Insurance and to divert profits in the form of dividend income to our wives.
If it helps, we should be able to apply for registered auditor status for the partner company and thus make it the audit partner in order to give it a bona fide, if contrived, role.
Do readers consider that the Frost case provides watertight authority for this scheme?
(Query T16,122) - JG.
I have re-read the answers to the original query and am declaring an interest. I was one of the contributors who seemed to dismiss the use of corporate partner, at least according to 'JG'. I never thought that the use of a corporate partner was not effective and none of the other answers suggested that it was not effective. They simply pointed out the practical issues there are with the use of a corporate partner if there are other ways of reducing taxes.
Among some of the issues here will be the need for the correct proportions of control of the limited company so that regulated work can be processed through the company. If the wives have voting shares, might that affect the status of a registered auditor? If they do not have voting rights and capital rights, are we running the risk of the settlements legislation? Is simply letting the company run down going to be effective if it is decided that it is no longer needed in the future. A more structured approach is needed to avoid the Inland Revenue alleging that there is a distribution of goodwill to the shareholders as the trade dwindles down.
My answer remains the same. The use of a corporate partner is valid and effective, but make sure that all the paperwork is in order and plan how profits will be allocated and how the partnership can be dissolved in the future. - Jim.
There is no need to seek justification for a company partner. It has been around for years. In the absence of a company, a change of partnership produces a new trading 'person', and contracts of employment or with utilities, services, asset lessors and suppliers have to be remade. Many firms own (usually unlimited) service companies, to be the continuing contracting party, so avoiding much of the upset. It is but a small step to make the service company limited and also a partner. Its normal services continue and, in addition, it can then transact with customers as needed.
There are, naturally, some refinements that make the arrangement more completely beneficial. It should be agreed that profits and losses are allocated in such shares or ratios as the partners shall, at the time of sharing, agree. This gives added flexibility. If VAT is involved, both the firm and the company should be registered, so that VAT on transactions between them cancels out. Partners' cars should be owned personally, not by the company or the firm, to avoid benefit in kind problems. Indeed, unless commercially desirable, the company should own no assets to which capital allowances or capital gains tax applies. Neither should it incur any disallowable expense; they should be refunded to it by the partners. This makes its financial profits equal the fiscal ones.
One understands the desire to contain Class 4 National Insurance predation, but care should be taken to maintain an adequate base for personal pension premiums, especially considering the reduced pension yield of the current low interest rates. It seems that no blessing is unmixed - Man of Kent.
Editorial note. A partnership which includes a company must deduct tax at source from certain interest payments (see section 349(2), Taxes Act 1988). There will also be complications if the loan relationship rules of Schedule 25 to the Finance Act 2002 apply to the corporate partner; see paragraph 19 of that Schedule.
