Early introduction of transfer pricing rules hits LLPs

Harris & Co chartered accountants report that some smaller accountancy partnerships and LLPs may need to reconsider their financial structure now that the transfer pricing rules have been changed earlier than expected, according to analysis by MacIntyre Hudson.

Under the government’s original proposals, legislation to counter the deriving of a tax benefit through the use by professional partnerships of service companies and the transfer pricing rules was due to be enacted in next year’s Finance Bill. However, the changes to transfer pricing have been brought forward and came into effect on 25 October.

Nigel May, tax partner at MacIntyre Hudson, said: ‘This accelerated introduction means that large partnerships and LLPs (and those smaller partnerships and LLPs that are elected into transfer pricing) must consider carefully the pricing methodology for transactions with any connected companies: the legislation is not limited to the service companies that are targeted and could as easily impact upon arrangements that had been put in place for commercial purposes, where a transfer price has not been maintained.’

Most partnerships and LLPs with no more than 250 staff and turnover less than €50m (£42m) will not be viewed as ‘large’, and May says that in most instances smaller enterprises will have only elected into transfer pricing because of the existence of a tax driven service company structure. He says practices in this category need to consider their options, pointing out that the majority of smaller partnerships or LLPs with such structures will find themselves outside of the transfer pricing regime in due course as they fall out of the period for which they have elected in to transfer pricing.

In other cases, it will become immediately obvious there is no reason to continue with the service company arrangement. May argues that some partnerships may be concerned about the potential tax risks in such an approach, saying that ‘there is a potential fear of the argument that because you abandoned the structure in the face of counteraction measures that there was no substance to the arrangement in the first instance. This is considered not to carry weight ie, there was real commercial substance to the service company arrangement: individuals were employed by the company, the company rendered real invoices etc.’

However, he cautions that those partnerships which to elect for the early abandonment of a service company structure need to look closely at the practicalities involved in areas such as employment contracts, pension provision and death in service cover.

‘These new rules will not in most circumstances impact on anything other than large partnership/LLP structures. However, for those who have operated a service company structure to benefit from these rules, whilst immediate consideration of the consequences is a must, there are options open ranging from an orderly withdrawal from the arrangement through to reconsideration of the raison d’être of the structure given the financial needs of your practice,’ May said.