Neville-Rolfe: Tax could have unintended consequences
Peers were last week split on the idea of making limited liability partnerships (LLPs) pay employer-style National Insurance contributions (NICs).
The possible Budget proposal was floated in the media last month and triggered strong opposition from the likes of the Law Society, City of London Law Society and Association of Partnership Practitioners.
The Financial Times reported last week that Chancellor Rachel Reeves has gone cold on the plan after Treasury modelling indicated that it could result in higher costs than benefits due to tax avoidance.
Conservative shadow Treasury minister Baroness Neville-Rolfe asked in the House of Lords last week what assessment the government had made of the impact of such an increase.
She went on: “Given that professional services contribute some 12% to GDP, and that almost all the UK’s leading accountancy and law firms operate as LLPs, has the minister examined the potential for unintended consequences such as increased incorporation or outsourcing, which could reduce, rather than increase, the overall tax take?”
Lord Livermore, financial secretary to the Treasury, replied: “There has been much speculation, as is usual ahead of a Budget. A lot of that speculation is irresponsible. I am not going to comment on individual tax measures now. We will do things in the usual way.”
Cross-bencher Lord Carlile observed that “in reality, the great majority of those who are partners in limited liability partnerships do not have any of the autonomy of self-employed persons but are treated as having such autonomy, and that it would be logical for all those who are in reality employed persons to be treated in the same way by the tax system”.
However, Liberal Democrat peer Baroness Bowles praised the self-employed sector, saying that those in it were “risk absorbers without access to various state benefits”.
She said: “Is the suggestion floated concerning LLPs potentially the thin end of the wedge to attach more tax to all self-employment?
“Possibly, there is an issue, in that LLP status transfers risk from partners to societies at no cost to the partners. If there is a moral case for payment for that risk transfer, surely, it must be separately investigated, not wangled through National Insurance.”
Lord Sikka, a Labour peer, commented: “Whether someone trades through a company or a partnership is a personal choice. That choice should not be incentivised by the National Insurance system.
“It is wrong to hand incentives to rich accountants and lawyers to dodge employers’ national insurance just because they trade as partnerships. That differential treatment encourages abuse and avoidance strategies.”
However, crossbencher Lord Pannick KC pointed out that the legal services sector brought in exports worth £9.5bn last year and that to increase the tax burden “would inevitably damage the ability of law firms to attract cases such as international arbitration and dispute resolution from abroad when we are in competition with Singapore, Dubai and other litigation centres”.
Conservative peer Lord Johnson argued that the LLP structure was “not a loophole; it is an opportunity for people to come together, and they are effectively charging tax on employing themselves”.
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