LLP tax changes to commence in April despite delay calls

by Calum Fuller

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13 Mar 2014

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THE INTRODUCTION of changes to the taxation of limited liability partnerships will go ahead on 6 April 2014 despite calls from the House of Lords Economic Affairs Committee and practitioners for 12 months' delay to the measures.

The lords recommended the easement to be put in place until 2015 in order to give firms affected an opportunity to adjust, but the Treasury and HM Revenue & Customs confirmed today they would press ahead in administering the new regime from next month.

The government is concerned that limited liability partnership structures allow "disguised employment" to take place, whereby people that 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.

Guidance released in February shows that, despite widespread adviser disquiet over the breadth of firms that could be caught within the regime, officials are pressing ahead with its introduction.

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.

Practitioners, however, hold 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.

There is also a sizable portion of partners from across the professions who will suddenly be considered employees; something likely to lead to awkward conversations and see salaried partners approach banks in order to raise the capital required to satisfy the third test.

That, firms maintain, 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.

Any delay, the Treasury said would be "unfair for the vast majority of LLPs which are now preparing to implement these changes from April this year", before adding such a delay would "undermine the government's commitment to a fair tax system and to tackling tax avoidance and would also result in a significant impact on tax receipts".

A spokesperson for the Treasury said: "The government is committed to creating a fairer tax system and to tackling tax avoidance. That is why we are taking decisive action to prevent tax losses arising from inconsistencies in the tax treatment of different types of partnerships. These changes will take effect from 6 April 2014 and there are no plans to defer implementation."

An HMRC spokesman added: "The new rules which will come into effect from April will deliver a fair outcome for taxpayers by ensuring those who are in reality employees are treated as such for tax purposes protecting over £3bn in tax."

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