Tax attack on partnerships

The Treasury plans to bring in additional revenue of £1.9bn on top of previous forecasts following proposals consulted over during the summer on the use of limited liability partnerships to disguise employment relationships.

Details set out under the heading, ‘Tackling avoidance and aggressive tax planning by the richest’ set out the plans and confirmed the government’s commitments that those with the most pay the most.

In his speech chancellor George Osborne said, ‘We will ensure the tax advantages of partnerships aren’t abused either.’

On October 25, 2013, the government already said it would act to prevent large professional partnerships and wealthy individuals concentrated in private equity from abusing the rules on compensating adjustments in the transfer pricing code (Finance Bill 2014).

As such the government is to next year introduce legislation which would be effective as of October 25, 2013. The moves follow the government"s review of partnerships, announced at Budget 2013, to counter the use of limited liability partnerships to disguise employment relationships and the tax-motivated allocation of business profits to corporate partners, which are generally taxed at lower rates than individuals.

During the consultation, the government received new information showing that the impact on alternative investment fund managers who operate as partnerships will be greater than anticipated.

The government now plans to take forward the proposals to bring in the additional revenue and confirms the expected yield from the measure has now increased to £3.27bn from 2013-14 to 2018-19 (Finance Bill 2014).

The first element of the partnerships review measure will affect mixed membership partnerships where partnership profits are allocated to a non-individual partner in circumstances where an individual member may benefit from those profits.

The second element will affect cases where partnership losses are allocated to an individual partner, instead of a non-individual partner, to enable the individual to access certain loss reliefs.

The changes will take effect from 6 April 2014 with the exception of anti-avoidance rules concerning tax-motivated profit allocations.

These rules come into force from 5 December 2013 in order to protect against risks to tax revenue.

Mark Saunders, tax director at PwC, said that some businesses exploitated the use of partnerships to avoid NIC and this needs to be tackled.

"At one extreme we"ve heard of fruit pickers trading as partners making a few pounds of profit per hour, a clear wheeze to avoid national insurance contributions and paying the minimum wage.

"But in some professions, such as the legal sector, there are good commercial reasons why someone has the title of partner without having a real equity stake in the business.

"It will be hard to work out where the dividing line is in practice between what"s legitimate and disguised remuneration, and today’s changes move the bar much higher than expected. For the many law firms where salaried partners are off the payroll, the tax changes could mean crippling costs.

"It"s not uncommon for half or two thirds of a law firm"s partners to be salaried and off payroll. For a mid tier law firm the extra NIC bill could easily be over £1m, and across the sector as a whole the costs could run to many tens of millions a year," said Saunders.