Baker Tilly has responded to HMRC’s consultation on proposals to change partnerships and Limited Liability Partnerships (LLPs) taxation.
The changes, which HMRC is planning to introduce from 6 April 2014, are likely to have a significant impact on professional services firms as they will:
1. Increase income tax and National Insurance liabilities by, for example, ending from 6 April 2014 the self-employment status of LLP members who would not normally be considered partners.
2. Impede the tax-efficient reinvestment of profits in firms by removing the tax benefits of companies which are members of LLPs or partnerships.
George Bull, Chair of Baker Tilly’s Professional Practices Group, said, ‘We are concerned that under the terms proposed by HMRC it will be difficult to determine the true tax status of certain LLP members. 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.
‘In addition, LLPs and partnerships frequently have corporate members in order to ensure that profits retained in the business are ring-fenced and, as a consequence, 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. We are concerned that, by imputing a dominant tax avoidance motive where none exists, HMRC intends to bring forward legislation which – because it ignores the commercial circumstances in which partnerships and LLPs operate - may well prove to be ill-judged, disproportionate, burdensome and potentially unworkable for many firms.’
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