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Government should delay changes to taxation of partnerships until 2015

11 March 2014

The House of Lords Economic Affairs Committee’s Finance Bill Sub-Committee (FBSC) has recommended in its report on the Draft Finance Bill 2014 that proposed changes to the taxation of Limited Liability Partnerships (LLP), due to come into force from April, should be delayed until 2015 to allow business to adapt to the changes and for a fuller consultation to be carried out to target the legislation properly

The Government proposes introducing legislative tests to determine if an LLP member is an employee or truly a partner. Failing these tests would make the member liable for income tax and National Insurance Contributions (NIC) as an employee and the LLP would pay employer NICs.

Nearly all the evidence received by the Committee was that the legislative tests failed to achieve the policy objective.  Many suggested that existing case law could be used instead.

Report findings

The Committee say it is still not clear what is the right approach.  A delay in implementation until April 2015 would allow for further consultation to target the legislation better and for businesses to adapt to the changes.

The Committee also raised concerns that the proposed changes to tax arrangements for LLPs would apply only to UK registered LLPs and not those conducting business here but formed outside the UK.

The report urges the Government to reconsider the position of non-UK LLPs.

The Committee is content in principle with proposed measures  to counter  shifting of profit to corporate members of partnerships to minimise tax liability and highlights the extent of this practice in the Alternative Investment Fund Management (AIFM) Sector.  But the Committee wants to see the legislation drafted more precisely. And it is concerned that the Government’s revised estimates of the tax yield  from these measures, and particularly the additional £1.92bn in 2015-2019 from the AIFM sector, show that the Government’s original estimates of tax yield were very wide of the mark.

Committee Chairman

Commenting Lord MacGregor, Chairman of the House of Lords Economic Affairs Committee, said:

“The Government is clearly right to look again at the taxation of Limited Liability Partnership members as the legislation introduced in 2000 has failed to bring their tax treatment in line with that of general partnerships, and provided opportunities to avoid tax liabilities. The Committee supports the need for change.

But the Government has created difficulties by substantially changing the nature of the original proposals at a very late stage of the Consultation process. Given that defects in the 2000 legislation have led to the present problems, it would be a mistake to run the risk again of not getting the legislation right.

Nearly all of our witnesses felt that the tests in the proposed legislation would not meet the policy objectives. There is also the practical problem for many firms that the start date of April 2014 does not accord with their accounting periods and would take effect when the Bill will not yet have had its parliamentary scrutiny.

That is why we have proposed delaying this part of the Bill until April 2015 in order to resolve the difficulties to which our witnesses have drawn attention. It may be for example that a case law test used for general partnerships would be a better approach.

We are very conscious of the potential yield of £3.26 billion for these measures overall. HMRC were not prepared to give us a detailed breakdown of the yield from various parts of the package. But it seems likely that the foregone yield from a delay in the salaried LLP members measure would be a small proportion of the total from the package, probably a few percent over the scorecard years, as most of the yield comes from the mixed membership proposals which we support.

We are concerned that the draft legislation on mixed membership partnerships is not drafted sufficiently precisely and urge HMRC to react to the points that were put to us. We are also concerned at the amount of tax lost from the practice of profit shifting, and that HMRC was apparently unaware of its scale and had allowed it to become embedded as acceptable tax planning."

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