Lords urge HMRC to delay LLP tax changes

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12 March 2014

HMRC: urged to delay tax changes

An influential House of Lords committee has added its voice to calls for the government to delay its partnership tax reforms until 2015, so as to allow LLPs time to adjust to the changes.

The committee reported that almost all the evidence it had been given on the changes in the in the draft Finance Bill supported the view that the proposed legislative tests to determine whether an LLP member was really a partner “do not achieve their policy objective”. Failing the tests would make the member liable for income tax.

But a leading accountants’ firm suggested the intervention had come too late. At the end of last month HMRC rejected calls for the 6 April start date to be put off and published revised draft legislation giving firms a three-month grace period to ensure funding arrangements were in place.

The House of Lords economic affairs committee’s Finance Bill sub-committee (FBSC) argued that a postponement was necessary. It also said it was not decided on what approach to partnership tax should be taken and that a delay would allow “a fuller consultation to be carried out to target the legislation properly”.

The committee pointed to the government’s change of approach towards the proposals in December and concluded “there is too little time to settle all the outstanding issues, get the legislation right and enable businesses to adapt to that legislation in time for a 6 April start”.

While understanding the importance to the government of the tax yield, “taking the time necessary to target these provisions more precisely would ensure that the resulting legislation was more robust and effective and that the new rules gained greater acceptability amongst taxpayers”, it said.

It also supported aligning the tests with firms’ accounting periods, saying: “A delay would also give time to make a proper assessment of whether these provisions should apply for the accounting periods of partnerships rather than for the fiscal year in order to reduce the administrative burden on partnerships affected.”

The committee pointed out that the government’s revised estimated tax yield from the taxation of partnership changes during the consultation period showed an earlier impact assessment had been “a long way wide of the mark”. The government expected a further £1.92bn would be delivered in 2015-19 by the alternative investment fund management sector.

The Lords also urged the government to reconsider the position of non-UK LLPs.

Committee chairman Lord MacGregor said: “The committee supports the need for change… but the government has created difficulties by substantially changing the nature of the original proposals at a very late stage of the consultation process. Given that defects in the 2000 legislation have led to the present problems, it would be a mistake to run the risk again of not getting the legislation right.”

He said that a foregone tax yield from salaried LLP members as a result of delaying implementation would be “a small proportion of the total from the package, probably a few percent”.

Mark Waddilove, a partner at accountants Baker Tilly, welcomed the FSBC’s report but said: “This may all be too little and too late for many firms who have already spent hours of management time and professional costs.” But he urged the HMRC “to listen and respond quickly”.

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