An official independent review of tax arrangements concludes that partnerships are at a disadvantage compared with other types of corporate entity. 

In the interim report of a review on partnerships, the Office of Tax Simplification, set up to give independent advice to the government, says that partnerships are 'very much the poor relation' in the way they are treated by HM Revenue & Customs and in public policy.

'Fundamentally, HMRC and the tax system generally needs to evolve a more supportive and constructive approach to partnerships,' concludes the review, which points out that about 10% of businesses are partnerships, accounting for around £150bn of turnover a year.

The report appears as concern grows about new measures to crack down on tax avoidance involving disguised employment at LLPs. While this was not part of the review's remit, the report says it 'cannot ignore' criticism of the new measures. 'We were told in many external meetings that HMRC generally treats partnerships, and LLPs in particular, as if they were exclusively avoidance vehicles,' the review says. 

'The views expressed by partnerships and agents were deeply felt and were clearly long-held. There is a need for balance here.' 

Other key themes identified by the report are that the current 'one-size fits all' approach of partnership tax leads to extra burdens and complexities for small businesses. 

The review briefly considers 'an extreme and radical' simplification, of simply treating LLPs as companies and requiring them to pay corporation tax. However it says this would be a significant policy change and is outside the Office of Tax Simplification's remit. 

’Our overall conclusion is that partnership tax works, but like a comfortable old shoe it is a little worn at the edges and may have a couple of holes coming through,’ Michael Jack and John Whiting write in the foreword. 

The office expects the chancellor to respond formally to the review in the 2014 budget.