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Clampdown on tax scams could hit LLPs

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20th Mar 2013
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Accountants in limited liability partnerships could have their self-employment status challenged by the taxman as part of a clampdown on tax scams announced in the Budget.

In his Budget statement earlier on Wednesday, Chancellor George Osborne said that he was presenting one of the “largest ever packages of tax avoidance and evasion measures”, although many had already been announced.

New announcements included agreements to share information with two more tax havens: UK Crown Dependencies, Jersey and Guernsey and new legislation to stop companies avoiding tax when making “close company” loans to directors and shareholders.

Limited Liability Partnerships

The misuse of the partnership rules has been a feature of many avoidance schemes closed down in recent years, HMRC said.

In the Autumn Statement 2012, the Government said that it would consider whether partnerships should be reviewed, as part of the rolling examination of high risk areas of the tax code. The government has now announced that it will consult on measures to:

  • remove the presumption of self-employment for limited liability partnership (LLP) partners, to tackle the disguising of employment relationships through LLPs; and,
  • counter the manipulation of profit/loss allocations (by both LLPs and other partnerships) to secure tax advantages

The proposal to scrutinise partnerships’ tax status appears is likely to worry accountancy firms and any of their clients who are in partnerships.

“Accountants need to get involved in consultation so it doesn’t undermine Limited Liability Status,” said Paula Tallon, managing director of Gabelle, a tax advisory firm. “Otherwise they could end up paying more tax.”

Close Company Loans

Close company loans are widely used by private companies of all sizes who don’t want to want to withdraw money as salary or dividend, tax experts say. The loans could be for an investment property which benefits the company as well as the person receiving the loan. 

It is common for private companies to lend money to shareholders. If the loans are still outstanding nine months after the year end, corporation tax is payable. 

Companies have been able to avoid a corporate tax charge (Section 455 tax) on loans in various ways. One way (often known as “bed and breakfasting”) is for the shareholder or director repaying the before the tax charge is due only for the close company to make a new loan to the participator shortly afterwards. Another loophole is to make the loan via intermediaries

HMRC will introducing new legislation to close the loophole. The changes will have effect for loans, payments, repayments and repayment arrangements made on or after 20 March 2013.

The changes will:

  • charge close companies on loans they make via intermediaries to their participators
  • charge close companies on other payments they make via intermediaries to their participators
  • update the repayment rules with an anti-avoidance provision

Offshore Tax

Guernsey and Jersey became the latest tax havens to agree to automatically share financial information on UK taxpayers with accounts in the Islands with the UK government. The overnment has made a similar deal with the Isle of Man.

The three agreements, which the Chancellor said will raise more than £1bn in taxes, are part of HMRC’s strategy to counter tax evasion.

The strategy, outlined in two documents (‘No Safe Havens’ and ‘Levelling the Tax Playing Field’), is three-pronged. The government shares information with other governments and tax havens; the taxman encourages Britons with money hidden abroad to come clean; and charges high penalties (200%) for tax evaders and make criminal prosecutions for the most serious offenders.

Rebecca Benneyworth, tax editor at AccountingWEB, said the agreements were “big news” and set out a “clear offshore strategy.”

Not everyone was impressed, though. Richard Murphy, director of Tax Research UK, blogged that although he welcomed the agreements with Guernsey and Jersey, the £1bn the UK Government hopes to collect seemed “modest”.

Murphy said that he was disappointed that apart from a reference to a General Anti-Abuse Rule (expected to raise more than £60 million in tax by 2014/15 and more than £85 million by 2017-18) would not tackle “multinational company tax abuse”.

Osborne reiterated that the Government was keen to encourage international efforts to tackle tax abuse through organisations such as the Organisation for Economic Co-Operation and Development (OECD) and the group of eight (G8), the world's leading industrialised nations.

“We want the global rules governing the taxation of multinational firms to be updated from the 1920s when they were first written, and made relevant to the global internet economy of the twenty first century,” Osborne said.

Within the OECD, the UK will lead on transfer pricing, Germany on maintenance of the tax base and France and the US will jointly lead on which country has the right to tax internet businesses, said Bill Dodwell, head of tax policy at Deloitte.

The next step is to agree tax goals, how they will be achieved and by when.

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Replies (10)

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Mark Lee headshot 2023
By Mark Lee
20th Mar 2013 23:01

re LLPs: Isn't this 'only' about salaried partners?

If memory serves there is a clause in the LLP Act which means that all members (partners) in an LLP are to be treated as self employed for tax purposes. Thus those senior people who were salaried 'partners' are deemed to be self employed if members of an LLP even if they don't receive a profit share over and above their 'salary'. In conventional partnerships they might have been treated as employees unless evidently on a par with other partners re access to accounts, attendance at partners' meetings and receiving a share of profits. 

Thus I assume that the issue here concerns only such people and not the full profit sharing partners/members in an LLP.

But it's a good few years since I stopped advising on partnerships and LLPs so am happy to stand corrected.

Mark

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By Ruddles
21st Mar 2013 07:57

Loans to partnerships

I'm awaiting clarification on whether the new legislation will apply to loans to Scottish partnerships. I can't see anything in the technical note that excludes them..

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By jon_griffey
21st Mar 2013 10:40

Partnership profit allocation

 

I am wondering where these measures to counteract the manipulation of profit/loss allocations  will be targeted.  Hopefully it will be just these aggressive avoidance schemes - which is fair game.  The fear is it will extend to husband/wife partnerships involving a non working spouse.  That would just force more people down the ltd co route.  However it looks like the days of using ltd co partners as a moneybox, for example in dental practices etc may be numbered.

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By North East Accountant
21st Mar 2013 10:54

Are hydrids dead?

What about a genuine LLP with individual members and a Limited Company member.

Sizable Capital Account in LLP belonging to Ltd Company.

Does this mean that Limited Company Capital Account must be in effect Nil at all times to avoid S455 charge?

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Nigel Harris
By Nigel Harris
21st Mar 2013 11:04

Is the UK becoming a tax haven?

I hear we now have the lowest rate of CT in Europe. It's all very well banging on about offshore tax avoidance, but presumably our European neighbours might soon be introducing their own anti-avoidance rules to prevent their nationals coming over to the UK to take advantage of our low tax rates! In a global economy this needs some joined up thinking - but then that's politics for you!!

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By david ryan
21st Mar 2013 11:10

close co loans

Will an overdrawn directors current account in a close co be deemed a loan and attract corp Tax if not repaid in full within 9 months of the co financial year end?

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By User deleted
21st Mar 2013 11:20

@David

Yes, provided the director is a participator. As has always been the case.

Regarding the company's capital account in the LLP (or other partnership) there was discussion on this point recently - my view is that such a capital account is not a debt, and is therefore outside the scope of s455. That view was shared by some, but not all. In any event, I don't see the proposed legislation changing that view.

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By AndyC555
25th Mar 2013 12:13

It'll be interesting.....

It'll be interesting to see how they approach this.

"If memory serves there is a clause in the LLP Act which means that all members (partners) in an LLP are to be treated as self employed for tax purposes."

I believe Mark's correct here and it's always previously been accepted by HMRC that a member of an LLP can't be an employee.

For other purposes, the  distinction seems to revolve around 'salaried' or 'fixed profit'  ( e.g the Employment Appeals Tribunal decision in Tiffin v Lester Aldridge LLP where it was held that held that a fixed share partner was not an employee.) 

I'd suggest a review of that and similar cases should be undertaken when reviewing LLP members.  My guess is that HMRC will be looking at salaried members but will struggle with fixed-profit members.

 

Andrew 

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By rosstax
02nd Apr 2013 21:34

close companies

presumably the point here is that whereas an LLP is treated, inter alia, as a regular partnership for corporation tax, sec 455 tax is not "corporation tax".

Harry

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By Micheal_Morley
13th Jun 2013 14:55

Full Judgement

For those of a legal mind the full judgement for this ruling is here

 

http://www.bailii.org/ew/cases/EWCA/Civ/2012/35.html

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