PROFESSIONAL SERVICES FIRMS operating as partnerships ought to be ready to comply with proposed taxation rules from 6 April despite concerns over their impact on business, HM Revenue & Customs has told the House of Lords Economic Affairs Committee.
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.
However, HMRC corporate tax director Judith Knott insisted moves against tax avoidance were not the prime motivation in the proposals.
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.
If partners are deemed to be employees, then employer's national insurance contributions at 13.8% will be due and other employment-related tax rules, such as benefits in kind and share scheme rules, will apply to them.
The tests have been criticised by practitioners and other stakeholders, who note they are unreliable indicators. Yet Knott suggested the requirements are unlikely to alter a great deal.
"It's been very clear from the outset that the start date was 6 April ," she said. "The measure has been costed from 6 April, so that's been clear all along. We think it should be possible for partnerships to comply by 6 April.
"Some partnerships may have to change their structure, but we don't imagine all will have to, and that's a natural part of changing legislation."
New guidance is due to be published on 17 February, although one member of the committee queried the strength of the legislation if guidance is required.
"Doesn't that go against what the Office of Tax Simplification is trying to achieve?", Baroness Wheatcroft asked at the committee hearing.
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