UK: HMRC – Partnership Consultation – Two Avoidance Issues

Last Updated: 21 June 2013
Article by Michael Cant

Summary and implications

On 20 May HM Revenue & Customs (HMRC) released a consultation regarding the taxation status of some LLP members and the manipulation of profits and losses by partnerships. The consequences will be that:

  • targeted anti-avoidance measures will be introduced to prevent the use of limited liability partnerships (LLPs) to avoid national insurance contributions (NICs) and income tax;
  • in practice the current position of fixed-share or salaried partners in the legal and accounting professions are unlikely to be affected by the changes; and
  • HMRC intends to prevent the use of schemes that look to allocate profits or losses between partners so as to reduce tax.

Background

The taxation of partnerships generally has been under scrutiny for a while, with the suggestion that some have been abusing the structures to achieve advantageous tax results, particularly in relation to NICs, income tax and capital gains.

The two aspects being consulted on now deal with aggressive schemes that address two unrelated issues where HMRC believes NICs and income tax are being avoided.

Issue one – Salaried Members

Upon the introduction of LLPs, some spotted the opportunity to re-badge employees to avoid NICs. This was often done by transferring existing employees to an LLP as members. Due to the statutory presumption that all members of an LLP are treated as partners, and hence self-employed, this was argued to achieve an NIC savings. In relation to some higher paid employees it was also possible to achieve an income tax saving.

Proposed changes

If an individual meets either of two conditions they will be classified as a Salaried Member and liable to income tax and class 1 NICs as an employee. The LLP would be liable to pay secondary NICs although the costs of employing the Salaried Member will be deductible.

The two conditions are that:

  • the Salaried Member would otherwise be regarded as an employee; and
  • the Salaried Member takes no economic risk and shares neither profits nor assets on a winding-up.

There would also be a targeted anti-avoidance rule (TAAR) introduced to allow artificial arrangements to be ignored if "the main purpose, or one of the main purposes" is to step outside either condition.

Issue two – allocation of profits and losses

There are various schemes being actively marketed which seek to avoid tax by allocating profits and losses between partners or members in an LLP with different tax characteristics so as to reduce tax. It is questionable whether all these schemes actually achieve the savings claimed and no doubt cases will follow before the courts. However, to put the matter beyond doubt, and to prevent further avoidance "Government considers that new legislation is now required to remove the risk".

Examples of the three different types of scheme are given in the consultation paper. Put briefly the three types of scheme are as follows:

  • Partnerships with mixed memberships – profits: these schemes allow income tax payers to obtain the benefit of lower corporation tax rates by involving a corporate member owned by the individual members.
  • Partnerships with mixed memberships – profits: profit deferral and working capital arrangements. To align long-term incentives and performance, profits are rolled up in a corporate member owned by individual members. At a later date the corporate member is dissolved. To fund working capital profits can be rolled up in a corporate member owned by the individual members.
  • Partnerships with mixed memberships – losses: these schemes focus on allocating losses in the early years against individual members who can set them against profits otherwise taxable at higher rates. In later years profits are allocated to corporate members owned by the individual members and taxed at lower corporate tax rates.

It is clear from this that HMRC has not, as it has in relation to issue one, identified the precise target for legislative changes. The questions it asks in relation to the three types of scheme are more open those asked in relation to issue one. A possible result of this is that whatever emerges by way of legislative change is likely to be complicated and wide in scope.

Interaction with the GAAR

If future schemes manage to negotiate their way around the legislation finally introduced they may still "fall foul of the GAAR". In stating this HMRC is clearly indicating its determination to block the sort of planning identified by both issues one and two one way or another.

Practical issues

  • Fixed-share or salaried partners in the legal and accounting professions are unlikely to be affected by the proposed changes in relation to issue one. Such partners generally do play a full role in their partnerships and both take risk and share profits, commonly as to 10 per cent of the element that is fixed. Such a partner would fall outside both conditions one and two.
  • Transferring a large number of low-paid employees to a limited liability partnership as members in order to avoid NICs was always likely to attract an HMRC challenge at some point.
  • In seeking to prevent avoidance in relation to issue two, HMRC may unintentionally inhibit the development of professional services. Will the changes eventually introduced impact the flow of external capital into professional services generally and, in the legal profession, the adoption of alternative business structures? There must be a danger that, in trying to prevent abuse, HMRC will block the development of genuinely commercial structures.

Commencement

The new rules will apply from 6 April 2014 in relation to profits and losses arising on or after that date. Beware: "There will be no grand fathering for arrangements entered into before this date".

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Smith & Williamson
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Smith & Williamson
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions