SOME MEMBERS of limited liability partnerships, including accountancy firms, could end up paying higher tax and national insurance contributions as a result of government proposals published this week.
HMRC is consulting on the tax rules governing partnerships with the intention of clamping down on the use of LLPs to disguise employment relationships, and the artificial allocation of profits and losses to secure tax advantages.
Under current tax rules, the tax position of partners is that they are self-employed and taxed as such. The tax treatment has made it attractive for LLPs to treat some staff as self-employed partners, but who are, technically, employees.
As a consequence of removing the LLP’s obligation to pay employer’s NI contributions, a significant tax saving is made.
“There is currently an unintended inconsistency in the way that LLPs and general partnerships are treated that means that some LLPs are able to avoid their employment tax obligations,” David Gauke [pictured], exchequer secretary to the treasury said in his forward to the consultation.
While HMRC’s proposed ‘self-employment tests’ are intended to catch only situations where the rules are being abused, Tim Stovold, employment tax partner at Kingston Smith, warns they will have wider implications for firms that have junior partners with minimal requirement to contribute capital to the business and a fixed profit share.
“If the rules remain in the form announced, these individuals will now be taxed under PAYE in the same way as employees and will also suffer tax on any benefits in kind provided to them such as medical insurance,” Stovold says. “The consultation document indicates that any artificial changes to partnership agreements to try to avoid these new rules will be clamped down on.”
The second strand of the review aims to prevent partnerships from allocating profits or losses in order to reduce tax.
“The government’s objective is to prevent unfairness and market distortion within the tax system by ensuring that inappropriate partnership allocations to a company or similar vehicle cannot create tax advantages,” Gauke said.
The consultation closes on 9 August.
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