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Accountants face tax ‘loophole’ crackdown

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18th Sep 2013
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The Liberal Democrats have vowed to close “unfair loopholes” in limited partnership firms as part of the party's efforts to tackle the remaining deficit fairly.

Speaking at the party conference in Glasgow this week, chief secretary to the Treasury Danny Alexander pledged to continue targeting the “wealthy” in its efforts to raise taxes.

He said the government will start by closing a loophole that allows partners to classify part of their earnings as eligible for corporation tax.

The Treasury believes this is used extensively by the Big Four accounting firms where many of them set up separate companies to pay workers. They then charge a nominal fee for those services and although that fee is never paid to the company, it is taxed at the 23% rate rather than the full rate.

Alexander said: “We are cutting corporation tax to encourage firms to invest, but not to give the wealthy a way to avoid the 45p income tax rate. So when the vast majority of people in an industry are finding ways to exploit that difference, and that industry is the preserve of the very wealthy, I have no hesitation in acting.”

The proposal has already been outlined in a HMRC consultation, which closed in August.

The consultation challenged the assumption that all individual LLP members in a firm are self-employed, which allowed them to pay less in income tax and NICs.

It proposed to restrict the allocation of profits and losses among partnership members, particularly between individual and corporate members, where re-allocations are carried out to reduce tax liabilities.

According to a recent BDO survey 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.

Alexander also said he would close a second loophole that allows private equity shareholders to siphon money out of their firms while avoiding the intended income tax.

PE partners are currently allowed to tax their income as capital gains as opposed to the highest rate of income tax. Partners lend money to their firms, which they typically receive back with a 30% rate of interest, often in lieu of a salary. They currently only have to declare these loans at market rate, meaning they can pay tax on those earnings as if they had been paid at a more common rate of 4%.

Together, Alexander believes both “loopholes” could be costing the Treasury up to £100m a year.

The British Venture Capital Association (BVCA) has since attacked Alexander for describing well established tax laws as “loopholes”.

The BVCA said: “These are straightforward commercial transactions – they are not structures designed to enable individuals to avoid tax. It is strange then to hear them entering the public arena in the language of newly discovered tax avoidance. This is party conference politics, pure and simple.”

It added that the framework couldn’t be seen as a loophole since its own tax experts had been in continuous dialogue with the Treasury and HMRC on this issue of loans made by PE partnerships.

The Treasury chief secretary did not confirm the party was considering raising taxes on those earning more than £50,000, as was suggested by an internal briefing note accidentally sent to journalists earlier in the week.

Replies (6)

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By stevebritgimp
19th Sep 2013 09:17

Generic subject

We could have this headline every week.

The reason these problems arise is there is a schizophrenic political approach that they want to reduce taxes on corporates to encourage business, but want to increase taxes on the wealthy out of fairness, not realising these are the same people.

Generic rant about policians...

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By AndyC555
23rd Sep 2013 11:23

Crux of the matter....

"The British Venture Capital Association (BVCA) has since attacked Alexander for describing well established tax laws as “loopholes”."         There's an awful lot of this.  A 'loophole' used to be a tax advantage gained in a way unintended and un-envisaged by parliament.  Nowadays for politicians and the media, a loophole is "any tax law, no matter how long established and no matter what its original purpose, that means someone doesn't pay the maximum amount of tax you could possibly imagine on any given income"

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By hiu612
23rd Sep 2013 15:36

More complexity

These wheezes are already coming under scrutiny from HMRC and the government as part of the focus on people exploiting the transfer pricing rules and corresponding deficiency rules to pay CT instead of IT. So now they need anti avoidance for the anti avoidance. And that's assuming that GAAR is as much use as everyone expects, and doesn't find the setup wanting. Is anyone else finding it is becoming increasingly complex to arrange some very simple transactions because so many of the 'loophole closures' are drafted so wide reachingly?

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By hiu612
23rd Sep 2013 15:36

More complexity

These wheezes are already coming under scrutiny from HMRC and the government as part of the focus on people exploiting the transfer pricing rules and corresponding deficiency rules to pay CT instead of IT. So now they need anti avoidance for the anti avoidance. And that's assuming that GAAR is as much use as everyone expects, and doesn't find the setup wanting. Is anyone else finding it is becoming increasingly complex to arrange some very simple transactions because so many of the 'loophole closures' are drafted so wide reachingly?

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By The Black Knight
25th Sep 2013 11:01

Then Danny boy should go back to school if this is the best he can come up with to save the UK economy.

Presumably he could not get his head round, umbrella companies, and contrived avoidance schemes, etc etc etc etc etc.

Not surprised though, the parliamentary accounts committee are having trouble understanding how basic vat works and believe that applying the transfer pricing rules is some sort of avoidance scheme. Some of the MP's on the panel must have trouble tying their shoelaces in the morning it's that bad.

£100,000,000 pocket money rule using.

£25,000,000,000 abusive avoidance

£85,000,000,000 Criminal Evasion (yes plumbers and the like)

Cost of government PRICELESS!

 

 

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By AndyC555
25th Sep 2013 11:27

Agreed

"the parliamentary accounts committee....believe that applying the transfer pricing rules is some sort of avoidance scheme."       Agreed. I'm waiting for the PAC to claim that companies are sneakily using the 23% rate of corporation tax to avoid paying 50% tax on their profits.

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