reef knot as metaphor for tax loopholes

Double partnership tax loopholes closure confirmed by Lib Dems

It’s a strange mix, this coalition government. The latest proposal confirmed by the Lib Dems in Glasgow to close two long-standing tax loopholes underlines the point better than most.

On one hand, you have the Tories. Their notoriety for shielding the Old School Tie brigade has been prevalent on more than the odd occasion this term.

Conversely, you have the Liberal Democrats. If they retain any dignity moving into the next election, it will come from Danny Alexander’s pursuit of the wealthy, ensuring they pay their dues like everyone else.

There can be few places more fitting than Glasgow for the chief secretary to the Treasury’s outlined plans to be announced.  Namely, to close yet more tax loopholes for society’s highest earners.

In a two-pronged initiative, aimed at private equity in LLPs and Corporation Tax, Alexander is hoping to add £100M to the HMRC pot by stopping:

  1. earnings being classed as eligible for corporation tax by partners
  2. partners receiving up to 30% interest, often in lieu of salary, on money they ‘lend’ firms to avoid the £0.45 tax rate

Big Four accounting firms targeted in tax loophole closures

One of the two practises the Treasury is targeting in this consultation is, in particular, employed by the Big Four accountancy firms. In its simplest form, it involves partners in a firm creating another company to pay its workers.

To carry out the process of paying the workers, the created company charges a fee. This fee then becomes the method of income for said new company and its owner(s).

Rather than being charged at the full rate of income tax, it is only taxed at just over half that, 23%. By cutting corporation tax, Danny Alexander is hoping to make this method of tax avoidance, “the preserve of the very wealthy”, untenable.

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Two tax loopholes being closed for LLPs

The double-whammy crackdown has been on the cards since the 2013 Budget. A consultation was launched in May on the back of Budget promises. It was closed for comments in August and now we are hearing how the results are likely to take affect.

The consultation, Partnerships: A review of two aspects of the tax rules, sought to address two basic LLP premise, namely:

  1. prevent tax loss arising from disguising employment relationships
  2. arrangements involving allocation of profits and losses among partnership members

It’s also worth noting the caveat from the consultation on the second item: “(not just LLPs)“. All partnership types, then, need to be aware of shuffling around profits and loss to reduce tax liability.

Partners in LLPs will no longer be presumed self-employed

The proposed closures of the tax loopholes go a little deeper than simply following the audit trail of profit and loss. It’s a little like a bespoke IR35 for partners, if you will.

As it stands, LLP Partners are presumed self-employed. That will no longer be the case. There will be means tests to establish this, something that 80% of LLPs surveyed by the BDO bemoaned as an administrative nightmare last month.

Although comments are now closed for the consultation, the BDO survey is still open. If nothing else, the questions will help clarify exactly what the proposals mean in real terms for LLPs and Partnerships.

A huge change will be the determining of whether a partner is salaried, hence liable for NICS and PAYE income tax.  In addition, the proposal gives HMRC free reign to reapportion profit and loss:

“…by making a ‘just and reasonable’ reallocation of part or all of the profits so that more tax is paid.”

Now, if you have private equity in a mixed partnership where both companies and individuals are involved in the allocations of profit and loss, be warned.  If you’re distributing equity to avoid paying HMRC on an individual level, you could see your use of these ‘tax loopholes’ about to close.

The reason behind it, according to Danny Alexander, is encouraging firms to invest. Rather this than have money siphoned out by the well-off as “…a way to avoid the 45p income tax rate.”

BVCA: tax loopholes are “not structures designed to enable individuals to avoid tax”

As you can imagine, there has been a strong rebuttal of the proposals, none stronger than those made by the BVCA.

Tim Hames, Director General of the BVCA, has responded in a press release ahead of Alexander’s party conference speech.

Hames argues that the war cry against the wealthy is a way to whip up support from Lib Dems in Glasgow and no more.

Furthermore, BVCA recognises the tax planning strategies Alexander is looking to outlaw as “straightforward commercial transactions”.

Whether or not you believe they are tax avoidance measures, it appears that these are two more avenues that look to have tape across their entry.

It’s not all over yet, though. There will be an ensuing period of informal consultation availed to all parties to finalise the new guidelines.

For partnerships, especially LLPs, it’s going to be an anxious wait for the outcome. When it comes to closing tax loopholes, the chief secretary to the Treasury means it when he says he has “no hesitation in acting.”

photo credit: kraifreedom, freedigitalphotos.net

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