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Exclusive: Partnerships reject HMRC tax proposals

Tax changes risk doing ‘more harm than good’, BDO survey finds  

28 August 2013

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By Manju Manglani, Editor (@ManjuManglani)

Planned changes to the UK tax regime for partnerships and LLPs are too complex and risk damaging the attractiveness of those business structures, research by accountancy firm BDO has found.

A hundred partnerships responded to the survey, almost half of them law firms and the rest a mixture of accountants, engineers, property and other professionals.

Eighty-three per cent of respondents said that HMRC’s tax proposals would make the partnership and LLP structure unattractive, encouraging more businesses to seek incorporation.

A further 80 per cent of respondents said that the complexity and administrative upheaval that HMRC’s proposals will likely create do not justify the additional tax revenue that the Treasury expects to generate.

“The survey suggests that HMRC’s proposals, as currently drafted, are likely to do more harm than good,” said Colin Ives, a partner in BDO’s professional services team.

“Loading ever more complex tax rules onto partnerships and LLPs to counter perceived avoidance will add costs but little value to businesses that are a major contributor to UK economic growth.”

Tests ‘unfair’ to partners

In a consultation that closed earlier this month, HMRC proposed removing the automatic presumption of self-employment for LLP partners to prevent ‘disguised employment’. Instead, it suggested two tests to establish if an individual member is, in reality, a ‘salaried partner’ and therefore liable to PAYE, employers’ and employees’ NIC.

HMRC also argued that artificial profit/loss allocation is used for tax avoidance where partnerships with mixed membership (i.e. individuals and companies) allocate profits or losses between members to reduce or defer tax.

However, 77 per cent of those surveyed said the two-test approach to determine self-employment is either unnecessarily bureaucratic or unfair because it gives HMRC more than one opportunity to reclassify a partner as an employee.

Similarly, only 18 per cent of respondents believe that the specific tests proposed by HMRC are the most effective way of determining self-employment. Respondents from the accountancy and legal sectors are among the least supportive of the tests, with only 17 per cent and 13 per cent, respectively, agreeing with HMRC’s approach.

However, there is no consensus on potential alternatives – 28 per cent said that normal employment status rules (i.e. contractual terms and conditions) are better criterion and 26 per cent said they would prefer for HMRC to rely on relevant case law – suggesting that HMRC will struggle to find a widely-accepted solution.

On the subject of profit allocation in mixed membership partnerships, the majority of respondents said that HMRC should only act in certain circumstances, such as if the structure used is clearly artificial (52 per cent) or if fraud has taken place (10 per cent). Eighteen per cent said that HMRC should never have the authority to reallocate partnership profits for tax purposes.

“The fact that some packaged schemes have used partnership structures does not mean that any use of a partnership structure is evidence of abuse,” said Ives. “The many genuine business structures that utilise partnerships should not be tainted by the few who seek to abuse them for artificial transactions.”

He also warned that the new tax regime could actually lower overall tax receipts rather than increase them. “The additional burden of the new legislation could create a scenario where many businesses decide to abandon partnership or LLP status and form companies instead. Paradoxically, this could result in a lower tax take as the newly-established directors opt to take their rewards selectively as dividends rather than salary and retain funds in the company.

“Rather than piling additional burdens onto partnerships and LLPs, we believe that the solution lies in a closer working relationship between businesses and HMRC. Provided that HMRC has a strong understanding of the partnerships and LLPs that it services, we believe that there is scope to better use existing legislation and case law to minimise abusive tax avoidance in this area.”

HMRC’s plans to change the way that LLP members are taxed have also been criticised as ‘premature’ by the Law Society of England and Wales. Gary Richards, chair of the Law Society's tax law committee, said the underlying policy of the proposals was "difficult to discern" and the scope was unclear.

"There's no denying that perceived tax avoidance continues to be a hot topic. But legislation would be premature until HMRC can refine the issues it is really seeking to address," he said. "There is a real risk that measures to address perceived avoidance may render the UK an unattractive place for investment."

The BDO survey received responses from over 100 individuals in partnerships and LLPs. The findings, which have been released exclusively to Managing Partner and an accountancy journal, will be published tomorrow in The Future of Partnership Taxation.

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