Firms united in LLP taxation concern

by Calum Fuller

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14 Feb 2014

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treasury-london

PROPOSED CHANGES to the way partnerships - and in particular, LLPs - are to be taxed appear to be heading inextricably towards being passed into law as they are, in spite of vehement protestations of firms.

HMRC and the Treasury are concerned that limited liability partnership structures allow "disguised employment" to take place, whereby people who are ostensibly partners in fact have a guaranteed income and little decision-making power. The worry for the government is that the well-established arrangement gives rise to tax discrepancies.

Despite a consultation period that began in May last year, with a new guidance document delivered in December and another expected next Monday (17 February), stakeholders are feeling increasingly ignored, and resigned to the idea the legislation will go through with the Finance Bill almost as currently drafted.

Under the draft proposals, partners must satisfy one of three tests in order to maintain their status. The first option is ensuring at least a quarter of their pay is profit-dependent; the second would see them contribute at least 25% of their ‘fixed pay' to the firm's capital; or the third option is to prove they have significant influence on the overall partnership.

The trouble is, the proposals put forward in December barely resemble the ones initially consulted on in May, nor do HMRC or the Treasury appear receptive to the grievances many firms hold. One possible reason for such intransigence in the consultation process is, unlike RTI, for example, the government in this case is trying to eradicate a particular behaviour, rather than encourage a new practice. Whatever the root of the perceived problems, the fact is, as HMRC's Judith Knott told the House of Lords' Economic Affairs Committee, the proposals are to come into force on 6 April.

Not a huge amount of time, then, for firms to restructure, or indeed make their case.

Professional services in the crossfire

And the issues identified by professional services firms are more a litany than the odd quibble. Chief among them is the fact that the measures are not truly aimed at professional services, rather other industries such as season agricultural workers employed through LLPs as a tax-saving measure.

Such practices, firms point out, could easily be targeted with much narrower legislation given that those organisations are self-evidently distinct from accountancy, law or wealth management firms.

Yet the wide drafting provides HMRC access to more revenue, something the cynics among the stakeholders speculate could be motivation for the current direction of travel.

Then there is the sizable portion of partners from across the professions who will suddenly be considered employees. It's likely to lead to a fair number of awkward conversations and lead to salaried partners to approach banks in order to raise the capital required to satisfy the third test.

That, say firms, could impede succession planning given the common use of salaried partner positions as a stepping-stone to full partnership as part of a two-tier system.

The fundamental feeling is politicians understand companies, charities and other structures, but not partnerships, and certainly not LLPs. This, oddly, is despite the fact LLPs have existed since 2001, when they were created in recognition of partnerships' need to limit liability. It is bizarre to many stakeholders that memories in Westminster have been so short that, just 13 years on, it is seen as a tax avoidance vehicle, despite its widespread commercial use.

To paraphrase the thoughts of many; despite its crudeness, the government appears satisfied as long as the tax revenues are boost, professional services are legitimate collateral damage. 

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