LLP ‘tax threat’ forces new government denial

The government acted on Tuesday (1 December) to calm the accountancy profession’s fears that switching to limited liability partnerships will trigger huge tax liabilities.

Department of Trade and Industry company law director John Grewe said it was ‘not our intention’ to make the change so unattractive. Such a move would be ‘fatal’ for the concept of LLPs, he added.

Accountancy firms expressed concern that winding up existing partnerships and setting up LLPs could be deemed a ‘taxable event’, triggering huge charges. Poor wording in the draft LLP bill raised accountants’ fears further.

But Grewe told the Commons trade and industry committee that adopting LLP status would not create a capital gains tax charge for partners and he also ruled out any income tax or stamp duty liabilities.

The Association of Partnership Practitioners warned: ‘For LLPs to prove attractive, it is critical premature tax payments are not triggered by the action of incorporating an existing firm as an LLP. This tension between the legal and tax consequences needs to be resolved by the Inland Revenue.’

The APP also criticised the compliance burden of LLPs having to register changes in the residential addresses of partners within 14 days, warning easy access to homes was ‘undesirable for reasons of personal security, particularly for high-profile litigators and insolvency practitioners’.

English ICA vice-president and PricewaterhouseCoopers partner Graham Ward told the committee ‘there is a danger that an LLP facing the possibility of a large claim may decide to wind up rather than continue in business and work itself out of trouble’. He said the bill, which could be law by next summer, made more onerous provisions for LLPs than companies: leading to fewer funds available to creditors, denying them cash that could be produced by the firm continuing to trade.

ACCA member Prem Sikka, professor of accounting at Essex University, said LLPs reduced the protection available to users of accountancy and audit services. Senior technical officer John Davies added that many LLP members could plead ignorance in the event of liquidation due to lack of access to management information.

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