Tax Faculty technical committee chairman Robert Maas told Accountancy Age.com that the new rules were ‘horrific’. He said the government should have raised the issue a year ago and said its failure to do so could scupper take-up of the new structure.
‘What they are proposing to do doesn’t necessarily look unreasonable,’ he said. ‘But why on earth didn’t they discuss this earlier?’
Up to 90,000 firms have expressed an interest in changing their status to a limited liability partnership, according to government figures.
The tax avoidance crackdown is thought to have been prompted by Inland Revenue fears that property investment companies could benefit from the advantageous tax status of LLPs.
And in today’s statement the Revenue said that in order to mitigate the risk of the new structure being used as a tax avoidance mechanism, it wanted to ensure exempt bodies are taxed on income from property they receive in their capacity as members of an LLP.
The Revenue said the same consequences would follow for shareholders in a company that disincorporates to form an LLP.
In a further move the Revenue said loans used to provide money to purchase an interest in an investment LLP would not qualify for tax relief.
The government said it wanted views on whether LLPs would be used for businesses other than professional partnerships so that it could determine ‘whether further tax legislation is required to provide certainty of tax treatment given that the creation of LLPs should not give rise to a significant tax loss.’
But Maas warned that ‘legislation by press release’ would not help win converts to the new structure.
LLP legislation was given Royal Assent at the end of last week. The new structure will become available in April 2001 but the Revenue said it would not set out its views on the tax treatment of members until December.
Full details about LLPs