Curtain To Fall On Profit Manipulation? - Steps To Put A Stop To The Misuse Of Partnerships

Pamela Sayers looks at measures announced in the Budget that affect many businesses involving LLPs and other partnerships.

The increasing use of a mix of corporate structures and LLPs by professional practices to take advantage of differing tax rates has prompted the Government to take action.

Disguised employment and manipulation of profits

Possibly prompted by the Legal Services Act coming into force, the Government has published a consultation on measures to:

remove the presumption of self- employment for partners of LLPs, to tackle the disguising of employment relationships through LLPs; and counter the manipulation of profits or losses by LLPs and other partnerships involving companies and/or trusts or other vehicles to achieve a tax advantage. The consultation process will lead to fresh legislation being enacted next year, likely to be effective from 6 April 2014.

The Government acknowledges that the current tax law deliberately makes all members of an LLP self-employed. It appears that it is not looking to stop this altogether, but rather to refine the circumstances when members will be regarded as self-employed. This would suggest that any change to the legislation is unlikely to be applied retrospectively.

The consultation document addresses the use of corporate partners for tax-avoidance purposes, which includes cases where individual partners benefit directly or indirectly from accessing the low rates of UK corporation tax, currently 23%, reducing to 21% from 1 April 2014 and to 20% from 1 April 2015.

Presumption of self-employment

Government scrutiny of the tax rules for LLPs may also stem from concerns that revenue from employer national insurance contributions (NICs) are being lost due to the difference in rates for self-employed individuals compared to those for employees and their employers. Individuals who have been given LLP member status may in all other respects be treated as an employee. Therefore, HMRC intends to remove the presumption that LLP members are self-employed.

In response to the increased use of LLPs to take advantage of reduced NIC liabilities for LLP members, whose remuneration is currently treated as self-employed remuneration, HMRC is considering providing limits and a targeted anti-avoidance rule (TAAR) on the self-employed status of partners. The changes proposed will apply where a member satisfies either of two conditions, in which case, they will be treated as employed by the LLP rather than...