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Law Society urges LLP tax backtrack

16 August 2013

The Law Society for England and Wales has urged the government to rethink its plans to reform Limited Liability Partnership taxes.

The Tax Law Committee of the Law Society responded to the government’s three-month consultation, concluding that the proposed shake-up could be damaging and should be reconsidered.

The changes, which the Chancellor first announced in April as part of the 2013 budget, are intended to curb alleged tax avoidance in certain LLPs. HMRC suggests the structure of the LLP is being used to “disguise employment relationships” with the aim of avoiding National Insurance Contributions (NICs). To combat this, NICs could be raised for LLP members, resulting in additional “management time and costs” as well as “uncertainty” for businesses.

Committee chair Gary Richards commented:

“There is a real risk that measures to address perceived avoidance may render the UK an unattractive place for investment. […] We expect that most, if not all, firms will be able to demonstrate that their partnership arrangements are not aimed at avoiding NICs but reflect the contribution that their members make to firms.”

At present, the members of an LLP are usually regarded as self-employed, and are taxed on their share of the business profits (as stated in the LLP agreement). Firms therefore do not make the same tax payments as they would for employees – HMRC argues limited liability partnerships are admitting new members inappropriately to profit from this tax break.

When or indeed whether the government intends to go ahead with the measures is yet to be confirmed, but LLPs are likely to be keeping a close eye on any developments.

For advice on formulating a compliant LLP agreement or for assistance on any partnership tax issues, get in touch with Ralli using the contact form.

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