Law Society lays into government’s partnership tax reforms

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12 August 2013

Law Society: reforms will generate uncertainty and costs

The government’s proposed tax reforms for limited liability partnerships (LLPs) are “haphazard”, “incoherent”, backward looking, and would introduce a “bizarre distinction” between business entities, according to the Law Society.

It raised a concern that tax authorities could subject law firms to “long lasting scrutiny” in order to meet revenue-raising targets from the measures, using guidance inappropriate “in the context of professionally qualified individuals”. The changes could lead to “uncertainty and cost” for solicitors.

In a damning verdict on the consultation on changes to tax rules affecting LLPs and some partnerships, the society added its voice to critical responses from accountants and City solicitors. It said that the reforms would create uncertainty for UK business advisers at a time when the UK needed to look attractive to investment managers.

The three-month consultation followed a Budget pledge to clamp down on tax avoidance by “disguising employment relationships” in LLPs and “allocation of profits and losses” arrangements in certain other partnerships.

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The society took issue with the consultation’s allegation that solicitors and other professionals were benefiting from self-employed tax status, arguing that at worst HMRC was losing out on National Insurance contributions (NICs).

A simple way to tackle the possibility of tax avoidance within LLPs would be to tweak existing legislation and ensure consistency between employment and tax law, the society argued. If individuals were considered employees of an LLP for general law purposes, they should be treated as employees for tax purposes. Equally, if they were LLP members but not employees for general law purposes, they should not be employees for tax purposes.

The society described the proposals as “incoherent”. It added: “While we believe that many, if not most, solicitors practicing through LLPs would not be subject to additional tax or NICs we foresee uncertainty and costs generated by the proposals… when dealing with HMRC enquiries.”

Gary Richards, chair of the society’s tax law committee, said the consultation was confusing. “Certainly, the scope is unclear. There is a real risk that measures to address perceived avoidance may render the UK an unattractive place for investment.”

The consultation appeared to cut across a number of other initiatives and tax treatment consultations already underway, he said, and HMRC should not legislate before 2015. “Legislation would be premature until HMRC can refine the issues it is really seeking to address.”

He continued: “The government is clearly looking to understand the economic rationale of firms establishing LLPs. We expect that most, if not all, firms will be able to demonstrate that their partnership arrangements are not aimed at avoiding NICs but reflect the contribution that their members make to firms.”

In its response, the society said the rule changes appeared to overlap with ‘loans to participators’ rules in the Finance Act 2013, and other rules relating to partnerships currently under review by the Office of Tax Simplification. It observed: “This seems to be a haphazard way of forming and implementing policy.”

The consultation’s “presumption… that a corporate member of the partnership is likely to be involved in some form of tax deferral or avoidance attacks the very use of partnerships as a business medium”.

The reforms were “odd”, “hark back” to rules repealed in the 1980s, and could introduce a “bizarre distinction” between types of business entity, since “a company and partnership in parallel direct ownership” would not be affected.

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