A proposal to bring LLP members within the scope of Employer NICs could, if implemented, lead to significant additional taxation for members of LLPs operating in the asset management and other sectors.
As the UK government considers how to reduce its budget deficit in the upcoming autumn budget, the Centre for the Analysis of Taxation ("CenTax") recently published a policy report recommending the expansion of employer-based National Insurance Contributions ("NICs") to partnership profits (the "CenTax Proposal"). The CenTax Proposal has been picked up by a number of mainstream news providers and is of particular note as versions of previous CenTax policy reports for non-domiciled individuals and inheritance tax were adopted in last year's budget, suggesting the Treasury may hold their reports in high regard.
The CenTax Proposal takes issue with the divergent tax treatment of partnerships (including general, limited and limited liability partnerships) and companies, due to partners generally not being subject to Class 1 Secondary NICs ("Employer NICs"). Conversely, companies are subject to Employer NICs at 15%, which is deductible in determining the company's profits subject to corporation tax. The CenTax Proposal states that for additional rate earners, this results in a 47% effective tax rate for partners versus 53.9% for employees of companies.
While simply a proposal at this time, if adopted by the UK government, the impact on partnerships – particularly LLPs in the asset management sector – would be very significant. It is suggested that partners themselves be responsible for a partnership's Employer NICs (charged at the same 15% rate as with companies) via a "top-up" rate on partners' income tax. This would increase the effective tax rates on partners by 6.9% for additional rate taxpayers, 7.6% for higher rate taxpayers and 9.6% for basic rate taxpayers. By way of an example, the effective tax rate on a partner in an LLP earning £300,000 would rise from 42.82% to 49.73% – a difference in take home pay of over £20,000.
At present, the proposals are limited to the thoughts of a think tank, and there is no firm indication that the government will actively pursue them. It is hoped that any such proposals would be subject to full consultation with appropriate stakeholders before any decision is made.
In addition to making the UK a less attractive place to do business and thus potentially hastening the departure of fund managers from the UK, such changes may encourage some asset management firms to incorporate their existing LLPs as limited companies. Incorporation may enable firms to accumulate profit (after corporation tax) within the limited company and so defer the payment of income tax until sums are paid out as salary/bonus or dividends. There is a risk, therefore, that the proposals could reduce overall income tax receipts from some asset management partners – particularly if profits are accumulated within a limited company and not distributed until after the individuals have ceased to be UK resident.
It is hoped that the Treasury will bear in mind the significant adverse impact such a change could have on the asset management industry and the competitiveness of the UK as a jurisdiction for financial services, especially at a challenging time when many internationally mobile asset managers have left the UK and others are considering relocating overseas due to other recent adverse changes in UK taxation.
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.
