Problems with new partnership rules

HMRC’s proposals for changing the taxation of partnerships and LLPs to tackle issues of ‘disguised employment’ are too complex and risk doing more harm than good, according to research by BDO report Harris & Co chartered accountants Northampton who are specialist small business accountants.

BDO’s study, The Future of Partnership Taxation, is based on a survey of individuals from partnerships and LLPs from a wide range of sectors, with 24% of respondents from the accounting sector. The findings show that overall, 80% believe the planned changes will create complexity and administrative upheaval without necessarily producing the £300m of additional tax revenue forecast.

A similar proportion (83%) say the proposals will damage the attractiveness of using partnerships and LLPs, and could have the unintended consequence of encouraging businesses to seek incorporation. This could result in a lower tax take as newly-established directors opt to take their rewards selectively as dividends rather than salary and retain funds in the company.

HMRC’s consultation on the new rules closed earlier this month. The proposals would remove the automatic presumption of self-employment for LLP partners to prevent ‘disguised employment’. Instead, two tests would be used to establish if an individual member is a ‘salaried partner’ and therefore liable to PAYE, employers’ and employees’ NIC.

The BDO study found that 77% of those surveyed thought that the ‘two test’ approach to determine self-employment was either unnecessarily bureaucratic or unfair, because it gave HMRC more than one opportunity to reclassify a partner as an employee.

Only 18% of respondents believed that the specific tests proposed by HMRC were the most effective way of determining self-employment. Respondents from the accountancy (17%) and legal sectors (13%) were among the least supportive of the proposals.

A similar proportion (18%) opposed the idea that HMRC should have powers to reallocate partnership profits for tax purposes in mixed membership partnerships which typically include both individuals and companies. However, the majority agreed HMRC should be able to act in specific circumstances, for example if the structure used is clearly artificial (52%) or when fraud has taken place (10%).

Colin Ives, a partner in BDO’s professional services team, said:

‘The fact that some packaged schemes have used partnership structures does not mean that any use of a partnership structure is evidence of abuse. The many genuine business structures that utilise partnerships should not be tainted by the few who seek to abuse them for artificial transactions