As a choice of business vehicle, partnerships offer a level of flexibility that companies may not enjoy. The perception at HMRC appears to be that, in some cases, this flexibility has been taken too far and “the misuse of the partnership rules has become a feature of many avoidance schemes”. The Chancellor has therefore announced an intention introduce new legislation designed to target the use of partnerships to artificially reduce tax liabilities.
One concern is that employers are avoiding paying national insurance by encouraging staff to become members of an LLP with national insurance rates on partners being lower than those payable by employers and their employees. The indications are that there may be a substance test introduced to determine whether an individual is to be treated as a member (and thus self employed) or an employee, and based upon similar tests already in existence we should expect to see consideration being given to voting rights, capital contributions of members, exposure to losses and remuneration which varies in direct correlation to the results of the business.
Whilst the artificial manipulation of partnership profits in order to gain tax advantage must understandably be discouraged it is hoped that any new legislation does not hamper the potential for improved participation and performance and the sense of loyalty to a business that genuine equity participation can encourage.
If you are concerned that the proposed new legislation may adversely affect you please contact either Andrew, Jigna or Karen for advice.