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LLP tax reforms 'premature', Law Society says

April 2014 reforms would ‘impose additional tax burdens’ on UK law firms  

12 August 2013

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By Manju Manglani, Editor (@ManjuManglani)

Plans by HM Revenue & Customs (HMRC) to change the way that LLP members are taxed have been criticised as "premature" by the Law Society of England and Wales.

The reforms, which would apply to all profits and losses arising from 6 April 2014, would remove the presumption of self-employment enjoyed by LLP members.

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," Richards said.

"There is a real risk that measures to address perceived avoidance may render the UK an unattractive place for investment."

Richards said the HMRC should look closely at whether the proposals cut across other remuneration initiatives and tax treatment consultations currently underway.

"HMRC need to refine their policy on partnerships and legislate, probably in 2015, rather than in a piecemeal fashion which just creates uncertainty for partners, whether in legal or accounting practices or other businesses operating through LLPs."

Richards questioned whether now was the time to impose additional tax burdens on firms and warned of the potential waste in management time and the cost of external advisers.

However, he expected that "most, if not all, firms" would be able to show that their partnership arrangements were not aimed at avoiding national insurance contributions but reflected the contribution that their members made to firms.

Wider criticism

Accountancy firms and the City of London Law Society (CLLS) have also criticised HMRC’s plans.

Baker Tilly said that, by ending the self-employed status of some LLP members, the reforms would increase income tax and national insurance liabilities.

"The proposed test to determine whether someone is self-employed will mean that individuals will have to exercise subjective judgements to determine their tax filing position, and this could result in subsequent challenges from HMRC,” said George Bull, chair of its professional practices group.

The new tax legislation "may well prove to be ill-judged, disproportionate, burdensome and potentially unworkable for many firms," he added. HMRC should consider “either merely repealing the statutory presumption of self-employment, or replacing the proposed new tests with a more objective scorecard based on factors such as financial risk, the amount of capital invested by a member in the LLP, and the proportion of results-related remuneration."

The reforms would also remove the tax benefits of companies that are members of LLPs or partnerships.

Bull said LLPs and partnerships had corporate members in order to ensure that profits retained in the business were ring-fenced and taxed at corporate tax rates rather than income tax rates. "It is interesting that in the consultation document HMRC recognises the commercial rationale for these arrangements, but then goes on to disregard it."

In their Managing Partner review of the proposed new partnership taxes, Colin Ives and Anna Jarrold of BDO also noted: “These new rules will clearly affect firms that have used a limited company partner to assist with funding their business and this option seems likely to no longer be viable in future.

“This element of these avoidance rules is disappointing, as it puts those who conduct business through a partnership entity at a competitive disadvantage to those who undertake their business through a limited company, thus affecting the choice of commercial vehicle that is best suited to the majority of those within the professions.”

The CLLS’ revenue law committee noted in its response to the consultation that it was "not credible" for the government to advertise the UK as 'open for business', while at the same time amending the tax rules so that a business structure used "for the last decade may well no longer be workable".

The CLLS said it would have been more sensible to wrap the LLP tax consultation into a wider review of partnership tax undertaken by the Office of Tax Simplification.

The HMRC consultation has now concluded. 

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