Parliament moves to close loopholes in limited liability partnership legislation

New clauses have been added to the Limited Liability PartnershipBill in the Lords in a bid to close loopholes and more anti-avoidance provisions will be introduced in the Finance Bill nextyear.

But Government Chief Whip Lord McIntosh of Haringey promised:’There is no intention to undermine the commercial certainty oftaxation for those businesses for whom the entity wasintended.’

Speaking during debates on the bill in the Upper Chamber, hesaid LLPs have been designed to meet the desire of professionalpartnerships for an entity which will allow them to operate withlimited liability while maintaining a partnership ethos.

He said the entity might also prove attractive to start-upbusinesses and multi-disciplinary businesses, and ministers haddecided it would be wrong to restrict the new structure to theprofessions.

But he added: ‘We have become aware that taxing LLPs aspartnerships might mean there is scope for them to havealternative uses for which they were not intended, where theprimary or only attraction may be their tax status.

‘We shall be looking further into these issues with the InlandRevenue with a view to bringing forward legislation in theFinance Bill 2001, which should be in time for the availabilityof LLPs.’One anti avoidance measure included in the LLP Bill will prevent’people buying into LLPs to claim tax relief for lossessubstantially in excess of their capital contributions.’

Another loophole being closed will prevent interest beingartificially manufactured on loans to buy a stake in the LLP andrelief claimed on the fake interest.

Tax reliefs will be limited to the amount a partner stands tolose if the LLP were wound up as insolvent, subject toconditions excluding sums temporarily lodged with the LLP.

The changes were agreed without a vote, but Lord Goodhart, amember of the Tax Law Review Committee supposed to put tax lawinto reasonably understandable English, protested: ‘Theminister has made our task considerably more difficult.’

Baroness Buscombe said interest on loans to provide funds to anLLP should be capable of being offset against income fromsources other than the LLP.

McIntosh conceded a demand from Lord Phillips of Sudbury for anamendment requiring LLPs to mention on business letters andforms that they are limited liability partnerships to preventany misunderstanding by third parties.

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