Consultation on Partnership and LLP Tax Arrangements Comes to an End


The government's consultation on the way partnership practices are taxed has come to an end. The consultation was set up to establish ways to prevent perceived abuse of the current tax system. The proposed changes are likely to create a great deal of uncertainty for traditional LLP practices and may lead to a considerable amount of reorganisation and restructuring among partnerships and LLPs.

Magnifying Glass Under the current system, LLP members are automatically presumed to be self-employed. As such, they receive favourable tax treatment with regards to both national insurance contributions and income tax. Under the government proposals, this will no longer be possible. HMRC argue that, in reality, the role of many of these members is much more aligned to that of an employee as they hold no decision-making power, have no equity or capital risk, are not entitled to a share of the profits; and are not entitled to a share of any surplus assets on a winding-up.

The second part of the consultation dealt particularly with the allocation of profits and losses to different members in order to reduce the overall tax burden. In most cases under scrutiny by the government, partnerships will create 'corporate' (or 'company') members as well as individuals. These corporate members are subject to corporation tax, 23% of profits, whilst individuals are subject to income tax which at the top rate is 45% of earnings. Clearly, by diverting profits to corporate members, the overall tax burden is significantly reduced.

HMRC believes that in scenarios as outlined above, a high proportion of profits are allocated to corporate members who, in reality, make little or no contribution to the business and in many cases, some or all of the individual partners will own the corporate member and can therefore benefit from the profits allocated to it.

Now that the consultation is over, we await the draft legislation to be published in late 2013 at which time there will be further consultation. Legislation will be introduced in the National Insurance Contributions Bill 2013 and the Finance Bill 2014 which typically will receive Royal Assent in June/July next year. The changes will take effect from 6 April 2014 although in reality we will not have absolute certainty with regard to the new provisions until the summer of next year.

The proposed changes are likely to create a great deal of uncertainty for traditional LLP practices, particularly with regards to the status of many of their members who have had the status of partner conveyed on them to reflect their experience but continue to be remunerated on a basis akin to an employee. The government has also established that it will be clamping down on tax avoidance and it will be hard for partnerships to justify the use of 'corporate partners' for any purpose other than a tax advantage.

During the consultation, the accounting profession and the legal profession have made significant representation to the government regarding the proposed changes to legislation.

Now that the consultation is over, there may need to be reorganisation and restructuring among partnerships and LLPs. However, affected LLPs and partnerships are urged to hold back from implementing any definitive changes until the proposals become law and the exact details of the legislation are known.

It must also be noted that the consultation document specifically indicated that any artificial changes to partnership agreements to try to avoid these new rules would be clamped down on.

For more information about these tax changes, please contact Tim Adcock, tax partner on tel: 0151 255 2300 or email tim.adcock@mitchellcharlesworth.co.uk. Alternatively, please complete a quick enquiry form and we will respond to you directly.

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