The Government announced at budget 2013 that it intended to consult on how to change two aspects of partnership tax rules in order to prevent tax loss arising from disguised employment relations through limited liability partnerships (LLPs), and certain arrangements involving allocation of profits and losses among partnerships(not just LLPs) members.
On 20 May 2013 the Government via HM Revenue & Customs (HMRC) issued its consultation document on a review of two aspects of the partnership rules in order to:-
1) Remove the presumption of self employment for some members of LLPs that seek to disguise employment relations; and
2) Counter the manipulation of profit or loss allocations by some partnerships to achieve a tax advantage.
The first issue is a review which they consider will level the playing fields in relation to the tax treatment of all partnerships ensuring that employment taxes are paid for by LLP members who should probably be counted as employees.
This proposal will affect salaried members, fixed profit members or any member that HMRC consider have been set up to take advantage of the current legislation which allows self-employed partners to avoid employers NIC at 13.8% of the member income which would be the case had they been an employee. One of the main areas to be considered is the level of risk the member takes in the partnership.
The second strand of the review will look at schemes where partnerships allocate profits or losses in order to reduce tax. These schemes often involve partnerships where there is a mixture of individual and company members. The government’s objective is to prevent unfairness and market distortion within the tax system by ensuring that inappropriate partnership allocations to a company or similar vehicle cannot create tax advantages.
The consultation seeks to reverse the advantage where profits in a mixed partnership are allocated to secure a tax advantage. An income tax will be levied on individual members on a ‘just and reasonable basis’.
Beavis Morgan will be making representations to HM Revenue & Customs on behalf of its clients. However, if you would like to know more about the proposals and how they may affect you and/or your business please do not hesitate to contact Joanne Heartfield or your usual contact.