LLPs reject new partnership tax rules

HMRC’s proposed changes to the tax rules of LLPs would make it harder for smaller firms to finance themselves and may drive many to transfer to operate exclusively through a company, according to BDO.

The top 10 firm recently surveyed 100 individuals from partnerships and LLPs from a range of sectors, with 80% of respondents saying the administrative burden of such changes would outweigh the tax benefits.

The Revenue closed their consultation on changing the tax rules of LLPs and partnerships, Partnerships: A review of two aspects of the tax rules on 9 August.

It proposed removing the automatic presumption of self-employment for LLP partners to prevent disguised employment...

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Comments

Full complexity as usual

mikewhit | | Permalink

"Initially, it is possible that an individual will be regarded as an employee of the LLP from 2014 and for that individual to also to have to consider the IR35 rules."

So an individual could then have three employment statuses: one for LLP, one for IR35 and one for employment law.

I don't believe it !!!

Tax simplification - where art thou ?

 

Come on guys ! If the LLP rules say you're an employee, why make things even harder ?

Or does your Occam's Razor need sharpening - or even a new blade ?!!

So many scams

the_Poacher | | Permalink

So many tax avoidance devices to get my head round, so little time. Wish I could concentrate on improving business performance not on avoiding paying towards maintaining UK services such as the NHS.

Mixed member partnerships

Ted Numbers | | Permalink

The proposals for MMPs are daft. What's the GAAR for if it won't catch the artificial and abusive stuff?

The problem is.... HMRC have a point    1 thanks

chEEK | | Permalink

I have to say that the above article reads as "Turkeys vote No to early Christmas".

I.e. no surprises there.

The list of "reasons" against the idea are utterly unconvincing. Having seen the arguments put forward against the IR35 legislation, there is nothing in what's said above that will alter HMRC's mind one iota. Examples:

"Respondents to the survey said that the proposed changes are too complex and risk reducing the attractiveness of the business structure."

Errr... yep, I think that was the idea.

"Because of this, the firm says that this could have the unintended consequence of encouraging businesses to seek incorporation, potentially lowering and not raising the Exchequer’s receipts."

Yep, again that was probably the idea as well. Now you either pay through PAYE, adding Employers NI (ER NI)  to your costs and a bit more in EE NI - or you face IR35 checks if you pay dividends. So I'm struggling to see how incorporating is much of a threat to be honest.

The point HMRC is making is valid - if you set yourselves up as a firm of people who are all self-employed... it doesn't look any different to a firm of people who are all employed. So why should there be a tax benefit to one group of people and not to another?

 

The root cause

This all comes about from the existence of ER NI. It is a tax on employing British-based workers, which disadvantages British people in the global workplace and even in their own market. If employing members of one group of people is 14% more expensive then those people will find less work, certainly when compared to people in lower cost base groups.

There may be a makeshift solution. The last Budget introduced an ER NI threshold for small firms. Rather than abolish ER NI in one fell swoop (which would be an impossible hit for the national coffers to take), the intention may be to increase the threshold at which firms start paying ER NI over time until it can be abolished. So - pressing for faster/higher increases in the ER NI threshold may be a second string to the bow here - the first string, of course, being to press for ER NI to be abolished as soon as possible.

It's very simple - why should employment be taxed so much more than other ways of working?

Tom 7000's picture

If...Partnership tax rates...

Tom 7000 | | Permalink

...where higher than employee rates...would they still be doing this?

No...its all about HMRC trying to get more tax. But to me thats fundamentally wrong

 

The UK government has different business structures eg

Employee

self employed

partner or member in an LLP

 

Why not just let them roll and make it simple.. If you are a partner you get taxed as a partner and no HR rights. If you are an employee  you pay paye and have HR rights.

 

Why all the argument ie you are in one category but taxed or HR'd in another. When I am the president I will simplify this..

 

If the government wants more tax put the rates up...its not rocket science.

 

Still I suppose it makes the lawyers more money ;o)

Tom7000 - yes and no

chEEK | | Permalink

(1) Yes, tax rates should be unified.

The different structures should not have such extreme variations in taxation, as I alluded to in my post above.

There are reasons for minor differences:

1. Who has the right to deduct expenses (my view is that everyone should, but that's another issue).

2. The risk of being out of work  may be a factor in this, much more true of a self-employed brick layer than an accountant or lawyer in a partnership firm, I'd say.

3. Issues such as the right to retain profits. Although this is not directly related to which taxes or tax rates are applied, it does affect the tax due over time from an individual and therefore the overall tax take from a given business structure.

 

(2) No, tax and rights are not directly related.

By "HR rights" I assume you mean employment rights (redundancy, unfair dismissal, holiday etc).

What many people miss here is that the tax you pay does not in any way pay for employment rights. The key point is that the employer bears the cost of the worker's employment rights, not the government (and the employer also pays the ER NI that is a cost of employing them). The government simply makes the laws that make companies do so.

And note that employment rights are very different from the rights that you (supposedly) get from paying EE NI which theoretically pays for your right to out-of-work benefits and for a state pension (and it used to provide people with the right to use the NHS). However, this has been eroded over time to the point that the NHS is available even to tourists, if you don't qualify for JSA then you'll get benefits from a tax-based fund instead and the state pension is a pittance. So there are no real benefits associated with EE NI, it is now a form of tax in all but name.

However, that's an aside. The key point is that nothing that you pay to the government is funding employment rights such as redundancy, unfair dismissal etc - they are all a cost to employers.

So it doesn't really work to talk about being able to pay less tax as a result of fewer rights, since the tax is not being collected to pay for those rights the point is moot.

Family partnerships

SimonP | | Permalink

I am pleased to read that HMRC will not be coming after the husband and wife businesses, where the allocation of profits can change year to year . . .  at least not yet.

Tom 7000's picture

fair point chEEK...but...

Tom 7000 | | Permalink

The point is when I am President there will only be one universal tax and it will be linked to HR, well that is if I decide to keep HR rights :)

HMRC already did - and lost

chEEK | | Permalink

SimonP wrote:

I am pleased to read that HMRC will not be coming after the husband and wife businesses, where the allocation of profits can change year to year . . .  at least not yet.

The Arctic Systems case was fought on HMRC's interpretation of the (somewhat ancient) Settlements legislation (aka Section 660a) and was appealed all the way to the HoL ending not many years ago (just pre Supreme Court I believe). It concerned a man/wife company where he was the fee earner and she was a shareholder, being paid dividends in whatever amounts suited them for tax planning purposes.

Essentially the law lords ruled that married couples could arrange their tax affairs pretty much as they wish, HMRC could not dispute their arrangements. In addition, they specifically pointed out that they had not considered how they would rule if the couple had not been married, since they had not been asked to do so.

However, HMRC have not been back on that one for quite a long time now as far as I know - it's been a while since I heard of a S660a case even for unmarried couples, but I haven't followed that aspect too closely in the last few years. Others may know more.

Hope this helps.

naomi2000's picture

LLP /partnership tax

naomi2000 | | Permalink

I can see that HMRC may get irritated by some of the sillier pinprick profit share arrangements .

However, it's going to be a bit difficult to convince new partners to come onboard if you can't offer fixed and guaranteed profit shares, at least for an initial period ,especially in these present "interesting" economic times.

 

 

@ Naomi. The full story (apologies for length)

chEEK | | Permalink

I don't think HMRC will see it as being within their remit to worry about how firms incentivise their staff. But presumably they would do so in the same way as other firms who have no realistic way to adopt an LLP structure (shares in a Ltd Co, bonuses, dividends etc).

Bankers who pay bonuses are paying 14% ER NI on all of that money, so HMRC are now looking at LLP structures asking themselves why it should be that accountants/lawyers etc should be any different. And it's important to realise that they do have a point.

However... that begs the question as to why there are so many different statuses/structures that all pay such wildly different amounts of tax. And why employment pays so much more than other ways of working.

Having experience of seeing all the arguments put forward when IR35 was new, I can tell you that every group of workers who come into the government/taxman's sights put forward all sorts of reasons why it shouldn't happen to them... and just about all of those arguments are a leaky as a sieve. The only way this problem will go away is for there to be one set of tax rates covering all ways of working - and, critically, it must not be as punitive as employment is currently under PAYE. ER NI has to go and then we're all on a level playing field (within a percent or so, in terms of personal NI rates).

Please see this as trying to help, I'm not shooting down people's arguments for fun. My concern is that, having "seen it all before" so to speak, I don't want to see history repeat itself. The more people (professions / tax structures) are targeted in this way the more they have a reason to work together. If you look at the history of the Professional Contractors Group (PCG) in dealing with IR35 then what you will see is a bunch of amateurs banging a drum very loudly and sounding very convinced of their case... and achieving nothing. In fact a fairly recent own-goal was 'achieved'.

The fact is that their arguments were emotive but weak. They have consistently touted the case for repeal of IR35, refusing to acknowledge that there was a problem to solve (people paying dividends could choose to pay no NI at all) and their argument should have been that IR35 went way beyond dealing with the actual problem. They were so dead set on being able to pay dividends and no NI that they lost sight of the fact that they used to be self-employed and happily paying the self-employed (Sch D) level of NI (prior to Section 44 and its predecessors that means that agencies may be liable for the ER NI if a self-employed person were found to be an employee in reality (so the agencies insisted on contractors using Ltd Cos, hence the dividend route).

Ultimately they stopped being confrontational and consulted with the Treasury and after the last general election they thought they were on the verge of victory (or at least their members did) when the promised "review" of IR35 took place. When it emerged that the PCG had actually put forward, instead of repeal, a suggestion of some bizarre "Business Entity Tests" instead, something of a furore ensued (they did this without even consulting their membership).

The Chancellor opted for that "solution", HMRC twisted the PCG-proposed tests (which were ludicrously easy to pass) into something else (that's ludicrously difficult to pass) and as such made no practical difference to most contractors except to make their life harder for government contracts... and people were left wondering if the PCG saw the end of IR35 as the end of themselves and decided not to ask for repeal as a means of self-perpetuation. Or if they really could be that dumb.

But the point is that repeal was never the right position. They should have argued for something akin to self-employment, arguing that forcing a Ltd Co onto a person who is effectively self-employed, having their remuneration paid into it and THEN charging the company ER NI on top of the personal EE NI is tantamount to double taxation when compared to someone who can do the same work in the same way via a self-employed structure and only pay the personal NI level on their fees. And since ER NI applies throughout their income at 14% it's actually much worse even than double taxation.

So, having set out with the wrong arguments, asking for the wrong things to happen...now they are nowhere. IR35, unjust in the extreme as it is, will be around a long time yet. I don't want to see people make the same mistake here. So please ensure that you play devils advocate on your own arguments and realise when you're backing a losing horse.

I am convinced that abolition of ER NI  is the way to sort out all these problems for all workers in all market sectors (possibly slowly over time, perhaps by gradually increasing the recently-introduced threshold at which it becomes payable). Effectively, when HMRC say "It's not fair that some people pay ER NI and you don't", the real answer is not to try to justify special status, it is better to reply "It's unfair that anyone pays ER NI at all". Why have a tax on using British-based workers in a global marketplace? It makes no sense at all.

Hope this helps.

Easy way to end it all    1 thanks

secondhand_22 | | Permalink

Maybe treat employed people the same as self-employed?

Maybe treat capital the same as income?

Why do people pay NI on earned income but not rental income?  Surely those who have £2m of property on which to earn rent are in a better position to pay more tax/NIC than someone who works and earns £20k?  Surely they are both equally likely to need to go to hospital/have (or had) kids who go to school?

 

Or am I missing something? 

As stated above

chEEK | | Permalink

As I said in previous posts, removing ER NI makes self-employed and employed just about the same. However, the anomaly is with share dividends that carry no NI.

The reasons given by government is that to tax dividends makes investment in UK companies less attractive. They also cite the 'little old lady' living alone on share income. Neither really hold much water. Other countries, such as Australia, tax dividends at 30%, which is about the same as their income tax rates for middle+ earners - playing devil's advocate, it's not really a valid argument to point at other countries and say "They do it, so it must be ok" since the same argument could be advanced for... the death penalty, slavery, torture etc.

 

Setting income tax at 30% and dividend rates the same would be fine, but there are some wrinkles:

1. Pensioners. This group pay no EE NI at the moment on the basis that they're supposed to have paid their dues and EE NI is supposed to pay for the pension they may have already already earned anyway.

2. Self-employed people have a slightly reduced NI bil under Sch D to reflect the risks (and on that basis it should probably be a lot less).

I think both of those groups deserve to continue to have the specialist treatment they enjoy now (despite the backlash over pensions that seems fashionable now their pension is a contractual right, not a benefit at all.

With the proviso that such anomalies will be properly catered for via a reduced rate of income tax, then I would be in favour of setting income tax at around 30% and abolishing ER NI.

It should be noted that ER NI revenues would need to be replaced since that is a business tax on employment, not  a personal tax on income. It could be paid for by further spending cuts over time or by increasing other business taxes.

naomi2000's picture

@cheek

naomi2000 | | Permalink

 I think that we all want to see Employer's NIC abolished until we start thinking about the transitional effects -know any pensioners ?

It's also worth remembering that UK social security rates are low by European standards -probably because you don't get much in the way of benefits to balance what you're paying out.

But actually my post is about pointing out a practical issue where the proposed new tax rules may have an unexpected impact on the business . Many partnership / LLP businesses are pretty traditional if not downright stuffy in their financial management and tend to assume that the proposed new rules aren't relevant to them. It's quite useful to get partners and members to focus on the new partner fixed profit share issue because it's a really simple and common example of how they can.

 

 

 

@Naomi

chEEK | | Permalink

I'm finding your post above rather difficult to understand. Some things I can glean however include:

1. I think you've misunderstood re ER NI. ER NI does not and has never been intended to provide any benefits. It is simply a tax on British jobs. Since it is a business tax it would hardly carry any personal benefits.

I mentioned that abolishing it would appear to put everyone on an even footing, but when I went on to talk about the anomaly with pensioners the difference is that they don't pay EE NI. The point being that their income tax level needs to be set at a lower rate.

 

2. Our levels of EE NI are very high compared to almost anywhere (check out Australia again, they have a medical deduction of 1.5% I believe). But that's a largely moot point since our EE NI is what used to pay for that, among other things, and that has changed as I mentioned in an earlier post - now we get virtually nothing for it. 

 

3. I struggle to understand why anyone would post anything in this discussion regarding "stuffiness". It also seems strange to be suggesting that accountancy firms would be "stuffy" with regard to tax law (in the sense that they may disregard it) - tax law is, after all, their forte.

And as pointed out above, there are other ways to offer profit shares in Ltd Cos, whether guaranteed or otherwise.

All in all, I don't want to get involved in a series of posts where someone is backtracking or re-defining their previous statements. It seems sensible to leave this here.