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.


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.


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

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

In association with
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.