New tax rules, same old issue

Following the anti-avoidance measures taken forward by the Autumn Statement, draft legislation was published in December regarding changes to partnership tax rules.  This also follows on from the announcement made in September regarding compensating adjustments in partnerships using service companies. I wanted to take a look at this in more detail.

The draft legislation means that the employment status of members in an LLP will now be questioned and profit shares between partnerships with corporate members will also be under close scrutiny.  The aim of HMRC being to claw back tax lost via the manipulation of the self-employed status and the differing tax rates of individuals and corporates.

So you could be forgiven for thinking that HMRC is giving partnerships, particularly LLPs, a hard time at the minute.   The above does seem to back up the view that HMRC targets LLPs as tax avoidance vehicles.

Partnership structures are generally favoured by professional practices and there are suggestions in the sector that the proposed changes will result in businesses being discouraged from setting up in partnership.

I personally disagree.  A partnership is often the simplest way of people running a business together.  The proposed legislative changes to treat fixed profit share members as employees also gives LLPs the chance to assess their management teams and their equity needs.  Those members that are currently on fixed shares could be encouraged to become full equity members. It also levels the playing field between LLPs and ordinary partnerships, as they have always had to treat fixed profit share partners as employees

At the end of the day, the proposed changes are aimed at those partnerships and LLPs that are structured to avoid tax, so if there is a good commercial rationale for a structure then it should be unaffected.  Hybrid LLPs are still a great option if the corporate member has a genuine function in the running of the business.

The traditional partnership and the Limited Liability Partnership are still a good option for your professional practice.  Flexibility is offered in terms of incoming and outgoing equity partners, the main bonus being that a share valuation is not required each time, as would be the case in a limited company.

I am still seeing conversion of partnerships to LLPs.  An LLP solves (to some extent) the traditional partnerships issues of limited liability and also gives the partnership a corporate feel.

We could see increased conversion to incorporating as a limited company but this is not a decision to be taken lightly with the valuation of goodwill and HMRC clearance required.  The plus points obviously being the lower tax rates of 20% or 23%, the use of directors’ loan accounts following the goodwill valuation and remuneration planning via dividends.

So I can’t help but think that we are back to the age old dilemma about the best structure for your business.

Ultimately the decision is up to you as to which structure you choose – I’d be interested in your thoughts on the matter – but whatever the outcome BHP can help you along the way.