HMRC Consultation Indicates Changing Stance to the Taxation of LLPs

Oct. 9, 2013 - PRLog -- London, UK (October 2013): A Limited Liability Partnership (LLP) is a company structure which shares many similar characteristics with a normal partnership. The main difference is that those who are in an LLP are only liable to what they contribute to the partnership and nothing in excess of this, hence the limited liability.

LLPs have only been in existence for just over a decade, but the take-up has been higher than anticipated by some.  One of the main drivers around this is the tax savings which could be accessed via the avoidance of National Insurance Contributions and the manipulation of profit shares.

In the 2013 Budget, Chancellor of the Exchequer George Osborne proposed radical changes to how LLPs would be treated in the future which means that some of these tax planning ideas could be restricted or made impossible.

As it stands, the LLP structure can provide several benefits such as disguising employees as ‘partners’ and ultimately saving the need to pay employer National Insurance Contributions. The other attractive benefit is the manipulation of profit and loss allocation to make use of more favourable tax rates between partners, particularly in so called “husband and wife” partnerships.

HMRC’s most recent consultation into LLPs (‘Partnerships: A review of two aspects of the tax rules’, HMRC published 20 May 2013[1]), was to address two fundamental tax advantages that an LLP structure can give rise to and to prevent those taking advantage of the structure solely for the avoidance of tax. The primary focus was to review and deal with:

1)      Disguised employees as ‘partners’ who then ultimately reap the benefits of being a partner rather than an employee of the partnership, but do not actually take the risk of doing so; and,

2)      Profit and loss manipulation to take advantage of marginal tax rates and therefore avoiding the need to pay more tax than is necessary.

1)      Disguised Employees

Under current legislation, those that are partners are to be treated as self-employed individuals and taxed according to their Profit Share Ratio. The main benefit of this is that the LLP itself will not have to pay Class 1 Secondary Contributions which essentially saves the 13.8% of the total ‘salary’ paid to partners.  Many LLP structures take advantage of this by promoting many of their staff to salaried partners.

Nick Tagg, director of Wisteria and Chartered Tax Adviser explained “LLPs have proved to be very popular with professional consultancy firms, including lawyers, accountants and investment businesses due to the tax planning opportunities available.  The new consultation provides interesting food for thought which might quickly remove the benefits around salaried partners and the NIC savings that result.”

2)      Profit and Loss Manipulation

Profit/Loss manipulation is the other perceived problem as LLPs can structure how profits/losses are distributed to reduce the overall tax payable.  This often involved moving profits to an individual who pays tax at the lowest rates.

Under the proposals, Revenue and Customs aim to tackle those arrangements where the main purpose is tax-avoidance.  Nick Tagg continued “so called husband and wife LLPs are also likely to suffer, particularly where profit sharing ratios change from year to year where there is no obvious commercial reasoning.  Members of LLPs will need to speak to their tax adviser in light of these changes to assess their own risks based on their trading history”.

The documentation released by HMRC appears to portray the changes as a way of challenging ‘aggressive tax avoidance’.  Certainly the changes will give food for thought, but the varying set up and use of LLPs will mean any legislation with need careful drafting if it is to capture the governments intended targets and exclude those who retain the LLP structure for genuine commercial purposes.

The proposed changes are likely to come into effect as of April 2014.

For more information in relation to the taxation of partnerships and the other professional services from Wisteria, please visit http://www.wisteria.co.uk

Press Contact & Further Info:

Richard Sham

Camrose House, 2A Camrose Avenue, Edgware, Middlesex, HA8 6EG, UK

Tel: +44 (0) 20 8952 0140

Email: info@wisteria.co.uk

Web: http://www.wisteria.co.uk

About Wisteria: Wisteria Chartered Accountants are an independent firm of specialist tax accountants and Chartered Tax Advisers, based in London.  The company provides a wide range of services to businesses, including tax compliance and tax planning services.  Wisteria is a member of the Institute of Chartered Accountants and the Chartered Institute of Taxation.

[1] See https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/200503/130520_Pships_Condoc_FinalVersion.pdf