United Kingdom: More Criticism Of HMRC Partnership Taxation Plans
23 August 2013
Posted by: Author: Amanda Banks
Author: Amanda Banks
Tax accountancy firms in the UK are warning companies of unintended consequences and unexpected tax bills, following the publication last month of an HM Revenue and Customs consultation document on partnerships and employees.
HMRC's proposals are designed to prevent tax loss through "disguised employment" via Limited Liability Partnerships and the allocation of profits and losses. However, Nigel May, a Tax Partner at MHA MacIntyre Hudson, describes the proposals as "deeply flawed," and Richard Godman of Menzies LLP is urging mixed membership partnerships to review their structures to see if they are likely to be affected.
Partners who are re-classified as employees will have to pay income tax through PAYE, while the company will have to contribute Class 1 National Insurance payments at 13.8 percent. Godson points out that given the salary level of LLP members, this "could amount to a considerable expense."
Nigel May, meanwhile, observes that "it is difficult to recall a consultation exercise that has produced such a level of criticism from such a broad range of respected sources," and he suggests that if the Government goes ahead in spite of this, it "would truly call into question whether there is any reality whatsoever to pre-legislation consultation."
MHA MacIntyre Hudson has collected a number of objections to the proposals. Critics say that the legislation lacks a clear understanding of the commercial and historic reasons why some businesses have a mixed partnership structure; that there is insufficient detail within the proposals of how they might operate; that deferral is equated with avoidance; that the proposals are excessive and blunt; and that it is not made clear how to avoid unintended consequences.
There are further claims that the proposals will make the UK unattractive for investment; that they undermine government policy; are distortive and anti-competitive; and that they would put obstacles in the way of international expansion, encourage financial irresponsibility, and impede generational change and the transfer of ownership .
Also, there is a concern that HMRC would use the change to carry out long-term scrutiny of individual firms.
These criticisms follow comments made last month by George Bull, who chairs Baker Tilly's Professional Practices Group. Bull argued that HMRC's proposed test of self-employment would require individuals to exercise subjective judgment, and that the tax body should instead either repeal the statutory presumption of self-employment, or introduce objective measures "such as financial risk, the amount of capital invested by a member in the LLP, and the proportion of results-related remuneration." He slammed the consultation proposals as "ill-judged, disproportionate, burdensome and potentially unworkable for many firms."