New LLP taxation laws will ‘decimate’ capital reserves, Lords told

by Calum Fuller

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04 Feb 2014

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Lords Economic Affairs Committee - left to right - Lord Best Lord Lawson Lord MacGregor Lord Lipsey and Lord Hollick

PROFESSIONAL SERVICES PARTNERSHIPS face significant costs to their capital reserves if they are to comply with proposed new taxation rules, the House of Lords Economic Affairs Committee has heard.

Any partnerships wishing to keep so-called salaried partners and abide by new rules would see their reserves "decimated", according to Law Society representative Gary Richards.

"It seems to be an administrative burden at a time the government says it's trying to reduce the burden on businesses," he said. "If you start operating PAYE and National Insurance for the newly-deemed employees, that is working capital that would've been put aside for a tax reserve and used to pay their tax in due course. It's now going to be going out of the door every month.

"These organisations are not companies, and the cost to the working capital is not insignificant."

HM Revenue & Customs 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 avoidance opportunities.

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.

However, the tests have been criticised by practitioners and other stakeholders, who note they are unreliable indicators. It may be unnecessary, for example, for a partner to put as much as 25% of their income into the partnership. The influence test, too, is currently over the company as a whole, something that many stakeholders suggest is unreasonable given the global nature of many of the businesses in question and the autonomy afforded to some areas of the businesses in question.

Guidance on the legislation is due on 17 February.

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