Accidental war on progress

In seeking to prevent tax avoidance, HMRC may restrict the development of UK professional services


Tax avoidance is front-page news. Every week we see another story about multinationals reducing their corporation tax bills or the creative use of tax havens. The Government has now set its sights on limited liability partnerships (LLPs)as it considers some are not paying their fair share. Is that right?

The ‘unfair’ behaviour of a few firms has brought into focus all organisations that have chosen LLP as the most appropriate vehicle for achieving their objectives. Upon the introduction of LLPs, some spotted the chance to rebadge employees to reduce their national insurance contributions (NIC) bill. This was done by transferring employees to an LLP as members. The statutory presumption is that all members of an LLP are treated as partners and hence self-employed. Converting a large number of employees to members to avoid NICs was always likely to attract an HMRC challenge.

The Government is concerned about tax avoidance schemes and most of these are structured around a partnership, usually an LLP. Measures to restrict loss relief are unsurprising, except that there are
already rules to target such schemes and it may be better to amend
those than introduce new rules, with all the problems that can cause.

Various schemes are being marketed that seek to avoid tax by allocating profits and losses between members in an LLP with different tax characteristics to reduce tax. It is questionable whether all these schemes achieve the savings claimed and no doubt cases will follow. However, to put the matter beyond doubt the Government considers that new legislation is now required to remove the risk.

The Government intends to introduce legislation with effect from 6 April 2014 to catch profits and losses arising on or after that date. The changes are expected to generate additional revenue for the Government of around £300m a year. The impact of the consultation may feel like yet more bad news for many struggling firms. There have been well-reported victims of the downturn while others have seen cashflow become increasingly difficult,  especially around tax payment deadlines.

We can, of course, expect a further consultation exercise before then, although that is more likely to deal with technical drafting issues than a discussion of the scope of the changes. The strong language used when these proposals were formulated indicates that the Government is unlikely to be dissuaded easily from pursuing action in this area.

In seeking to prevent avoidance HMRC may unintentionally restrict the development of professional services in this country. Will the changes eventually introduced
affect the flow of external capital into professional services generally and, in the legal profession, the adoption of ABS? 

There must be a danger that, in trying to prevent abuse, HMRC succeeds in blocking the development of genuinely commercial structures. We all wait to see HMRC’s definition of ‘fair’.