The Government has announced plans to consult on major changes to the rules governing LLPs, with the intention of removing the presumption of self-employment and minimise the tax advantages for LLP partners.
In today’s Budget, announced by Chancellor of the Exchequer George Osborne, the Government said it would consult on measures which could force LLPs – including law firms – to pay national insurance for partners who are currently classed as self-employed but are technically employees.
“The misuse of the partnership rules has been a feature of many avoidance schemes closed down in recent years, and the Government announced on 5 December 2012 that HMRC would consider the taxation of partnerships,” the Budget document said. “As a result of this work, the Government will consult on measures to remove the presumption of self-employment for limited liability partnership (LLP) partners, to tackle the disguising of employment relationships through LLPs; and counter the artificial allocation of profits to partners (in both LLPs and other partnerships) to achieve a tax advantage.”
Partnership experts said the proposals were not a surprise, but could result in firms having to examine their partnership agreements to ensure they complied with the rules.
“It’s no real great surprise,” said Addleshaw Goddard partner William Wastie. “Historically the national insurance regime for partners and professional services firms has been quite benign, but it doesn’t surprise me they’re looking at these arrangements because there’s significant savings.”
He said firms with “properly-drafted” partnership agreements would probably be compliant with any changes. “We’ve always been of the view that you need to be very careful in LLPs to ensure that partners do have the appropriate badges of self-employment,” Wastie added.
Fox Williams senior partner Tina Williams added: “A review of the presumption of self-employment is an entirely predictable move by the Government. A number of partnerships, particularly in the financial services sector, have promoted very junior individuals to the partnership in order to avoid paying employer’s national insurance in respect of them. This should be stopped.
“For most professional partnerships, which are appropriately selective as to who is admitted as a partner and which confer on those people rights and responsibilities commensurate with that position, this development may ultimately be welcomed for providing certainty in this area.”
Colin Ives, a partner at accountancy firm BDO, said the impact on law firms “would be interesting to see”.
Ives said the LLP and partnership regime was being used to help businesses cut costs through national insurance savings.
It was unclear how the Government intended to “counter the artificial allocation of profit”. Ives suggested this could involve legislation that would prevent LLPs from setting up a corporate structure, into which profits were paid, which means LLPs can pay corporation tax rather than partners paying income tax at higher rates. “That could come under the spotlight,” he said.
Williams said the Government should examine the “manipulation of partnership profit and losses” in film financing arrangements, and any legislation should address such schemes.
“If the proposals are very broad and restrict, for example, the ability of firms to pay profits to corporate partners, then this will be problematic,” Williams added. “The freedom for partnerships to allocate profits among partners as they see fit is one of the defining principles of partnerships and a key differences between a partnership and a company. This fundamental principle should not be interfered with for partnerships running genuine businesses.”
Ives also said the Government might look at loss allocations in the case of collapsed LLPs. Partners in both Dewey & LeBoeuf (25 June 2012) and Halliwells brought claims following the firms’ collapses seeking to offset losses against taxable income.
Changes to LLP legislation are due to be introduced in the Finance Bill 2014, and would likely come into force in 2015.