HMRC plans for LLPs 'make it difficult to determine true tax status'

Plans by the HMRC to remove the presumption of self-employment enjoyed by LLP members have been attacked by accountants Baker Tilly and the City of London Law Society.

In his budget report, chancellor George Osborne said measures were needed to "tackle the disguising of employment relationships through LLPs".

Baker Tilly said the changes, due to be introduced in April 2014, would increase income tax and national insurance liabilities by ending the self-employed status of some LLP members.

It would also remove the tax benefits of companies which are members of LLPs or partnerships.

George Bull, chair of Baker Tilly's professional practices group, said: "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.

"We think 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."

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."

Bull said the new tax legislation "may well prove to be ill-judged, disproportionate, burdensome and potentially unworkable for many firms".

In its response, the City of London Law Society (CLLS) revenue law committee said 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 be more sensible to wrap the LLP tax consultation into a wider review of partnership taxation being undertaken by the Office of Tax Simplification. The deadline for responses to the HMRC consultation is 9 August.