LLPs urged to prepare for ‘fundamental changes’ to tax law…
Leading North West accountancy firm Mitchell Charlesworth says Government proposals to change the tax arrangements of Limited Liability Partnerships (LLPs) could result in fundamental changes to their corporate structure.
Mitchell Charlesworth has offices in Liverpool, Manchester, Chester, Widnes and Warrington. Its specialist tax partner Tim Adcock said the HMRC consultation follows an earlier announcement in the budget that the Government would examine removing the presumption of self employment for LLP members.
A consultation document published by HM Revenue & Customs says: “There is evidence that LLPs are increasingly being used and marketed as ways to avoid taxes. The ability to use LLPs to disguise employment was never intended and gives rise to significant scope for the avoidance of employment taxes. If left unchecked these arrangements will continue to distort the LLP purpose and ultimately threaten its future use.”
The consultation proposes legislation to prevent partnerships from manipulating profit allocations for tax advantage and to stop certain partners from receiving favourable tax treatment.
“This consultation is very important for LLPs and could have profound implications”, Mr Adcock said. “The first of the proposed changes will remove the automatic presumption of self-employment from members of an LLP. As such under the current system members receive favourable tax treatment with regards to both NICs and income tax. However, HMRC argue that in reality the role of many of these members is much more aligned to that of an employee. This change will hit LLPs with fixed profit share, non equity partners who shoulder no economic risk, resulting in a higher burden of employment taxes’.
Mr Adcock said the second proposed change, which was not expected, is designed to stop the channelling of profits through ‘corporate partners’ in order to reduce the tax liabilities of individual partners. In this context corporate partners are companies.
“In these cases, corporate partners which often make little or no contribution to the business are subject to corporation tax at 23 per cent of profits, while individuals are subject to income tax, which at the top rate is 45 per cent of earnings,” he said. “Clearly, by diverting profits to corporate partners, the overall tax burden is significantly reduced. In order to stamp out this tax avoidance arrangement, the Government outlines that if profit is made, then all of the profits allocated to corporate partners will simply be reallocated to partners paying income tax.”
Mr Adcock said the proposed changes will clearly have big implications for existing LLPs and those firms considering converting to LLP status.
“The future tax arrangements of LLPs are likely to require extensive and detailed planning. We urge LLPs to start preparing for these changes at the earliest opportunity.”
The consultation ends on August 9 with changes scheduled to come into force on April 6, 2014.
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