“Disguised salary” and LLPs: postpone changes to get them right

After 12 years of established law in this area, it’s disappointing (if understandable) that the Treasury should mount a smash-and-grab raid on the professions to increase the tax yield. 

Understandable because of the size of the potential tax yield. By the time of the Autumn Statement, the anticipated yield 2014/15 – 2018/19 had grown from initial estimates of £1.345bn to a whopping £3.265bn.

And disappointing because the potential tax yield comes at the expense of major retrograde steps for the affected firms. 

The form of the proposals which were the subject of the summer 2013 consultation has changed dramatically. To retain the self-employed tax status of their members, professional firm LLPs either have to:

  1. disrupt highly evolved remuneration structures (Condition A); or
  2. distort governance structures (Condition B); or
  3. change, at very short notice, the balance of practice finance by moving away from LLP-level banking arrangements and increasing reliance on partner capital (Condition C).

At the time of writing this, we know that changes will be made to the draft legislation, and HMRC’s guidance notes will be rewritten. Uncertainty abounds but the impact of the proposed changes is already being felt. For example, the new legislation probably won’t receive the Royal Assent until July 2014, but the first affected tax payments had to be made on 31st January 2014. What’s even worse, HMRC has stated that they will not provide formal clearance on how the new tax rules will impact specific individuals or firms until July 2014.

Faced with the need to make the best of a bad situation, most firms whose members might otherwise lose their self-employment tax status are having to consider making changes to partner capital. For many, this will involve borrowing from the bank to meet increased capital requirements as at 6 April 2014. With the best will in the world, banks will not be able to meet this huge upswing in demand. We therefore urge HMRC to allow a period of grace of at least six months from 6 April 2014 to enable new partner capital requirements to be met, funds borrowed where necessary and lodged with the LLP.

George Bull, chair of professional practices group, Baker Tilly Tax and Accounting