HMRC will crack down on the way that partnership status is allegedly being used to avoid tax. The government announced, in last week’s budget, that they are looking at ways in which they can “tackle the disguising of employment relationships through LLCs” and attempting to combat the “artificial allocation of profits to partners to achieve a tax advantage.” Some experts believe that a substance test may be forthcoming because this would enable HMRC to collect more tax revenues from law firm employees.
The government has clamped down on the use of the LLC structure as a means of avoiding tax in recent years and this is the latest in a long line of similar moves. The document that was included within the budget highlighted the fact that the LLC structure has been used by many tax avoidance schemes in recent years and the latest changes look to prevent employees from being classed as partners in order to avoid the payment of National Insurance and other ways to avoid the payment of full tax.
Tax avoidance issues have hit the headlines recently as major corporations, celebrities, and big earners have been named and shamed for their willingness to avoid paying tax. Major organisations like Starbucks and Google have come under the tax avoidance spotlight. Meanwhile, celebrities that used legal but “immoral” tax avoidance schemes also saw their names hitting the headlines for all the wrong reasons.
An LLP, or Limited Liability Partnership, is a form of business structure that was introduced in 2001 and combines many of the benefits of partnership with those of a company structure. Partners enjoy limited liability ensuring that personal assets are not put at risk from potential creditors. This protection did not extend to companies and partners that use fraudulent and illegal business practices. The LLP structure was essentially established as a means to offer protection to corporations, like lawyers and legal firms, that operated as a partnership. Such firms would not have previously enjoyed the same protection as company structures could.
There are a number of ways that LLPs have been able to benefit financially and through tax relief offered by becoming a partner and this has led to some employees being classified as partners to enjoy reduced tax without really being a partner in the true sense of the word. Partners may be required to show that they are true partners, through financial investment and profit sharing, in order to receive the tax benefits that they are expecting.
There are likely to be a number of cases appearing that will highlight the exact requirements for somebody to be considered a genuine partner. More than 1,500 law firms are currently classified as LLPs and the government will release plans of how it will go about policing the reforms and the exact requirements of law firms and their partners. The changes are set to come into force as part of the Finance Bill 2014 when a range of other changes and amendments are also made.
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