Pamela Sayers looks at measures announced in the Budget that affect many businesses involving LLPs and other partnerships.
The increasing use of a mix of corporate structures and LLPs by professional practices to take advantage of differing tax rates has prompted the Government to take action.
Disguised employment and manipulation of profits
Possibly prompted by the Legal Services Act coming into force, the Government has published a consultation on measures to:
- remove the presumption of self- employment for partners of LLPs, to tackle the disguising of employment relationships through LLPs; and
- counter the manipulation of profits or losses by LLPs and other partnerships involving companies and/or trusts or other vehicles to achieve a tax advantage.
The consultation process will lead to fresh legislation being enacted next year, likely to be effective from 6 April 2014.
The Government acknowledges that the current tax law deliberately makes all members of an LLP self-employed. It appears that it is not looking to stop this altogether, but rather to refine the circumstances when members will be regarded as self-employed. This would suggest that any change to the legislation is unlikely to be applied retrospectively.
The consultation document addresses the use of corporate partners for tax-avoidance purposes, which includes cases where individual partners benefit directly or indirectly from accessing the low rates of UK corporation tax, currently 23%, reducing to 21% from 1 April 2014 and to 20% from 1 April 2015.
Presumption of self-employment
Government scrutiny of the tax rules for LLPs may also stem from concerns that revenue from employer national insurance contributions (NICs) are being lost due to the difference in rates for self-employed individuals compared to those for employees and their employers. Individuals who have been given LLP member status may in all other respects be treated as an employee. Therefore, HMRC intends to remove the presumption that LLP members are self-employed.
In response to the increased use of LLPs to take advantage of reduced NIC liabilities for LLP members, whose remuneration is currently treated as self-employed remuneration, HMRC is considering providing limits and a targeted anti-avoidance rule (TAAR) on the self-employed status of partners. The changes proposed will apply where a member satisfies either of two conditions, in which case, they will be treated as employed by the LLP rather than self-employed.
Profit or loss allocation arrangements
In response to divergence between higher income tax rates and lower corporation tax rates, there has been an increased use of 'mixed' partnerships (those including individual partners subject to income tax and other partners who are not, such as companies). There has also been an increased use of partnership arrangements to allocate profits, losses or other assets to achieve minimum incidence of tax (for example, losses being allocated to individual partners who have been able to offset those losses against other income taxable at higher income tax rates, or profits allocated to corporate partners which are taxed at lower corporate rates, and other avoidance arrangements).
It is proposed that these opportunities be stopped where the, or a, main purpose of the arrangements is a tax- avoidance purpose. It is recognised that the proposals will catch arrangements dealing with potential future forfeiture conditions for certain remuneration planning, as well as arrangements which seek to use corporates as a means to minimise tax costs associated with financing working capital.
Simplification of partnership tax The Government has also asked the Office of Tax Simplification (OTS) to review ways to simplify the taxation of partnerships. There are a number of areas around the administration of partnership tax issues and disputes that would benefit from improvement. In addition, clarification on the tax transparency aspects of partnerships for a range of taxes and reliefs may also be an area for discussion.
Close company loans to participators
Subject to certain exceptions, the rules on close company loans to participators charge the company lender an amount as if it were corporation tax. The amount payable is equivalent to 25% of the amount of a loan or advance made to an individual who is a participator in the company or an associate of such a participator. It is also payable where a company receives the loan or advance in a fiduciary or representative capacity and is a participator in the close company or an associate of such a participator. Relief from the requirement to pay the amount equivalent to corporation tax (or the right to the repayment of that amount) is available on a claim where the loan or advance is repaid or the debt is released or written off.
The provisions could also apply where an intermediary person, other than the original close company, makes a payment or transfer to an individual or company participator.
Measures effective from 20 March 2013
Three changes to the close company loan to participator rules are proposed to deal with avoidance in this area, effective from 20 March 2013.
- The rules will apply where the loan is made to any form of partnership where a participator (or their associate) who is a 'relevant person' is a partner. There is also an extension of this rule for certain trust arrangements.
- The rules will apply to arrangements where value is extracted from a close company which is a party to tax-avoidance arrangements and a benefit is conferred (directly or indirectly) on an individual (or their associate) who is a participator in the close company.
- There is a 30-day rule to restrict relief for loans or benefits repaid where the amounts repaid and redrawn exceed £5,000 and the amounts redrawn are taken in an accounting period subsequent to the accounting period in which the repayments are made. If the rule applies, the repayments will be treated as repaying the new amounts drawn in preference to the previous advances. If the amounts outstanding are £15,000 or more at the time of repayment and, at the time of repayment, arrangements have been made for a new payment of £5,000 or more to be made, the repayments will be treated as repaying the new amounts drawn in preference to the previous advances whenever made. However, neither of these restrictions applies where an income tax charge arises on the repayment on the person by reference to whom the loan, advance or benefit was a chargeable amount.
Further consultation
The Government will consult later in 2013 on the structure and operation of the tax charge on loans from close companies to their participators. If further legislation is needed, it will be included in the Finance Bill 2014.
Who will be affected?
In relation to professional practices the content of the 2013 Budget and the subsequent partnership consultation document mirror the theme of tackling tax-avoidance. While partnerships and LLPs offer great flexibility as business vehicles, HMRC believes that there has been misuse resulting in unfair tax advantages. We shall have to wait and see whether any fresh legislation will apply to all partnerships or only those with structures in place to artificially reduce tax liabilities. However, we do not believe that the Government is looking to target genuine commercial businesses that have been structured appropriately.
Action required
All participants should be undertaking a review of their current structure to assess the new and proposed changes, together with a review of the status of each individual LLP member.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
