Firms face squeeze as new LLP tax rules finalised

Many accounting firms are likely to see their profits decline and some may even go bust when new tax rules for limited liability partnerships (LLPs) start in April, an expert has predicted.

The warning comes after HMRC published final guidelines for the legislation after a review. The new rules are intended to stop partners pretending that they are self employed to avoid tax.

Some avoidance schemes that were closed down in recent years involved misuse of partnership rules, HMRC has said.

After lobbying from accountants...

Continued...

» Register now

The full article is available to registered AccountingWEB members only. To read the rest of this article you’ll need to login or register.

Registration is FREE and allows you to view all content, ask questions, comment and much more.

Comments

If the big(ger) firms can't    2 thanks

Sheepy306 | | Permalink

If the big(ger) firms can't afford the additional tax and that makes them genuinely insolvent then I would suggest that they have slightly bigger problems than this. Yes, profits my decline, or alternatively partner salaries may be reduced downwards to compensate.

Luckily for the smaller practitioner (and their clients) the LLP partners tend to have genuine input to the firm and therefore operate as was intended, not an artificial arrangement.

How sad    3 thanks

the_Poacher | | Permalink

that these people might have to pay more like the tax and NI that the government intended.

Why not IT Contractors?    1 thanks

njpandya | | Permalink

Why not the same can be applied to IT contractors who are technically working for 1 employer on Monday - Friday basis and employer who has more influence on their decision MUST be treated like PAYE! There are thousands if not millions in London City alone, unless HMRC is turning their ears to eyes! Note these IT contractors made up of Husband & Wife is systematically damaging tax structure, not their fault because HMRC is not smart enough to track this. They not only earn 6 figure salaries, but pay far less tax & NI. I have seen a contract of 3 - 6 month running in more than 3 - 4 years. In the strict accounting principle those arrangement must be brought under the definition of PAYE & not Ltd or Self-employed. 

I agree in part njpandya,    2 thanks

Sheepy306 | | Permalink

I agree in part njpandya, IR35 has never been properly enforced, everyone knows it. However at least IT contractors take some financial risk, they typically have short-term contracts, receive no pension, health insurance, sick pay, maternity/paternity pay or paid annual leave, they also complete time sheets and raise invoices, they're often brought in to undertake and oversee specific projects. A salaried (LLP) partner is usually no more than a high ranking manager and is an employee through and through.

However!    1 thanks

njpandya | | Permalink

Sheepy,

Working in finance for a recruitment firm what I have witnessed is on an average any given contract coming to an end after 2 to 3 years & in particular contractor terminates the contract because he/she getting much better deal elsewhere. The factors you mentioned above such as "short-term contracts, receive no pension, health insurance, sick pay, maternity/paternity pay or paid annual leave, they also complete time sheets and raise invoices" they are true but applies to tiny part of the contracting industry & just not been part of PAYE contractors are getting million times better deal that the combination of all. Technically if a project manager is handling project running in millions it is practically impossible he will be committed to more than one oraganization. I blame HMRC! as a most ridiculous institution.

There was an inevitability about this    2 thanks

mgbacchus | | Permalink

The LLP taxation rules were poorly thought through in the first place, in my view.  The result of this was that many organisations structured themselves as LLPs to minimise their National Insurance payments.  Ironically, of course, given the complaints now being made, many of these organisations were advised by accountancy or legal firms on how to do this.

Unfortunately now what we have is a change in the rules which will penalise both the bad and the good and increase the complexity of the tax legislation still further.  As I say, this was inevitable.  Some of us predicted it (dare I say) the moment the rules were brought in and it became obvious that LLPs could be used in this way.

I still do not understand why LLPs were not taxed the same way as companies from the start.  After all, they have limited liability like companies, they follow much the same law and they report publically in the same way as companies.  If they had been, the whole issue would never have arisen.

jon_griffey's picture

That doesn't make sense    1 thanks

jon_griffey | | Permalink

mgbacchus wrote:

I still do not understand why LLPs were not taxed the same way as companies from the start.  After all, they have limited liability like companies, they follow much the same law and they report publically in the same way as companies.  If they had been, the whole issue would never have arisen.

If that had been the case then there would have been no need for LLP's as they would be no different from ltd companies.

paying fixed pay to the profit pool

stgreg | | Permalink

“A partner will be considered an employee for tax purposes if….the partner pays less than 25% of their “fixed pay” to the partnership profit pool”
What does this mean?

Paying fixed pay to the profit pool    2 thanks

NStJL | | Permalink

The third condition is that the partner has made a capital contribution of at least 25% of his or her total projected profit entitlement for the coming year.  That is any fixed profit share plus bonuses or other profit allocations (but not benefits in kind on which self-employed partners are not assessed).  The reference to "partnership profit pool" is nonsense.

nonsense

Comptable | | Permalink

NStJL wrote:

The reference to "partnership profit pool" is nonsense.

Thanks - How are we supposed to deal with a tax system when they write nonsense? How much else, that we think we understand, is actually nonsense?

tonyaustin's picture

Partnership profit pool    1 thanks

tonyaustin | | Permalink

is not referrd to in the draft legislation or HMRC guidance. I do not know where the author of the original post got it from. The draft legislation just refers to contribution to LLP and means the amount of capital contributes by the member and held on capital account.

if the LLP is financed by bank borrowings, it should be possible to restructure these with a loan direct to the member to provide capital - as long as the LLP does not go bust of course!!