Budget crackdown on misuse of partnership structure to avoid tax

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By Legal Futures

21 March 2013


Bull: genuine partner attributes needed

HMRC is set to scrutinise the status of law firm partners after measures announced in yesterday’s Budget to crack down on using partnerships to avoid tax.

The Treasury is to consult on removing the presumption of self-employment for limited liability partnership (LLP) partners, “to tackle the disguising of employment relationships through LLPs” and also on countering the “artificial allocation of profits to partners (in both LLPs and other partnerships) to achieve a tax advantage”.

George Bull, chair of accountants Baker Tilly’s professional practices group, said: “Firms with fixed profit-share partners may be at risk if these individuals do not have some genuine partner attributes. This may, for example, include an obligation to make a capital contribution or a right to share in the firm’s assets.”

Alison Bond, head of professional partnerships tax at Deloitte, said it could involve a “substance test” for determining whether an individual is to be treated as a partner or an employee.

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“Any such substance test is likely to mirror the case law tests already applied to general partnerships and those applied for employment law purposes. These focus on ‘hallmarks of equity ownership’ such as voting rights, capital contribution, exposure to losses and remuneration which varies in direct correlation to the results of the business.”

On the “artificial allocation of profits to partners”, Mr Bull said: “Certain structures allowing profit allocations to be assigned to low-tax entities without any commercial justification, or allowing commercial allocation of a tax loss not aligned to the tax relief, are both likely to be scrutinised. This sends strong signals that the government will not tolerate using partnership/LLP structures to avoid tax.”

Ms Bond said this was likely to focus on the use of corporate partners alongside individual partners, as well as the use of partnerships to allow wealthy individual investor-partners to benefit from tax incentives such as business premises renovation allowances.

“Increased use of corporate partners is in part explained by commercial and regulatory complexities but often also by a desire by business to take advantage of the UK’s low rates of corporation tax,” she explained.

“There is a wide spectrum of ways in which corporate partners can be used. However, it would seem that, at one end of the spectrum, there are arrangements which HMRC consider to be designed to artificially manipulate the rate differential between (low) corporation tax rates and (high) income tax rates.”

Also affecting partners, the government will be consulting on collecting Class 2 National Insurance Contributions through self-assessment, alongside income tax and Class 4 National Insurance, “which would see the end to the current monthly or six-monthly payments that partners have to make”, Mr Bull explained.

He added: “The Office of Tax Simplification will be reviewing taxation of partnerships to identify any ways in which this can be simplified. This is very much welcomed.”

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