HMRC criticized on partnership taxation plans


HM Revenue and Customs have been accused of “imputing a dominant tax avoidance motive where none exists” in relation to proposed changes to the taxation of business partnerships. HMRC published proposals in May, following an announcement in Budget 2013. Exchequer Secretary to the Treasury David Gauke explained that the changes would “remove the presumption of self-employment for some members of Limited Liability Partnerships (LLPs) that seek to disguise employment relationships” and “counter the manipulation of profit or loss allocations by some partnerships (not just LLPs) to achieve a tax advantage.” The changes, which are planned to come into force from the start of the next tax year, will increase income tax and National Insurance liabilities and “impede the tax-efficient reinvestment of profits,” by removing tax benefits. George Bull, who chairs Baker Tilly’s Professional Practices Group, was quoted as saying that the HMRC’s proposed test of self-employment would require individuals to exercise subjective judgment. He suggests that HMRC should instead either simply repeal the statutory presumption of self-employment, or introduce objective measures

“such as financial risk, the amount of capital invested by a member in the LLP, and the proportion of results-related remuneration.”

Bull further notes that LLPs and partnerships often have corporate members, which ensures that profits are ring-fenced and taxed at corporate rates, and he complains that:

“HMRC recognises the commercial rationale for these arrangements, but then goes on to disregard it.”

He contends that by assuming a tax-avoidance motive, HMRC may bring forward legislation that may be:

“ill-judged, disproportionate, burdensome and potentially unworkable for many firms.”