New year, new rules

/ 3 March 2014

David Whiscombe

BKL tax’s David Whiscombe was quoted by the ICAEW’s Economia magazine in an article about new tax legislation for 2014/15 and how advisers can help clients take advantage of it.

The following text is taken from the online version of the article.

Changes To the tax rules around LLPs, due to take effect in April, bring reforms that are understandable in their general direction, but are, say many, counterintuitive in practice. 

The first part of HMRC’s draft legislation on partnerships is designed to tackle disguised employment within Limited Liability Partnerships (LLPs), whereby businesses, by structuring themselves as LLPs, might be seen to avoid payroll costs and secure tax advantage. HMRC’s reforming aim on this has been seen as broadly acceptable. However, its approach has confounded many in the profession.

You can see why mixed partnerships may be fair game for HMRC, but not unmixed ones, which of themselves are usually inoffensive


HMRC is providing a new statutory test for whether individuals are properly speaking to partners or employees instead of adopting established and well-understood case law tests. And the new test, which is similar to the case law test for employment, but not entirely the same, applies only to LLPs, not to general partnerships. “So two otherwise identical businesses with exactly the same relationship between the partner and the business will need to apply different tests,” says David Whiscombe, director of BKL Tax. 

Businesses and their advisers will be looking closely at whether individuals who are currently partners within an LLP can be regarded as such once the new regime takes effect, he says. “People will be looking, if they have members who don’t meet the statutory test, at whether they can change the relationship so that they do meet the criteria.” This may include salaried members looking to put capital into the partnership. However, it seems likely that there will be some salaried members who won’t meet the criteria who will simply have to be added to the existing payroll, says Whiscombe. 

The second change to the LLP legislation is in relation to “mixed partnerships” involving both individual and company partners. 

“It is fair to say that ‘mixed partnerships’ have been used in a vast number of ways, ranging from the relatively benign (such as using a corporate member simply to allow tax-efficient provision of working capital) right through to aggressive and artificial tax avoidance schemes,” Whiscombe adds. He claims that the new approach is a very blunt instrument, which in an understandable attempt to counter unacceptable avoidance also catches relatively innocuous planning. But he says that the main problem arises from over-zealous anti-avoidance rules, which bring into the net not only partnerships that are in fact “mixed” but also ones HMRC believe it is “reasonable to suppose” might have been mixed but for the new rules. 

“You can see why mixed partnerships might be fair game for HMRC,” says Whiscombe. “But not unmixed ones, which of themselves are usually inoffensive. Not only is it bizarre for HMRC to think it’s justifiable to attack a structure which is not of itself objectionable simply because an objectionable structure might otherwise have been chosen, it also introduces a ridiculous amount of uncertainty into deciding what structures are caught.” 

David Whiscombe


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