Levelling the playing field for LLPs and individuals

Along with the introduction of the GAAR and in yet another attempt to tackle tax avoidance, the government is currently discussing changes to the Finance Bill and National Insurance Contributions Bill for April 2014. This latest proposal is aimed at aligning the taxation of members within partnerships, including LLPs, with other taxpaying individuals.

Currently, partnership and LLP members are able to receive more favourable tax treatment in terms of income tax (IT) and national insurance contributions (NICs) because they are not considered to be an employee of the company. LLPs, in particular, have been marketed for a number of years as a way of enabling people to work together as partners, thus avoiding employers NIC contributions and reducing substantially the overall NIC liability of the organisation.

In addition, it is common practice for LLPs and partnerships to allocate profits between members to ensure that the optimum use is made of the individual’s personal allowances and tax rate thresholds as well as the more flexible rules relating to deduction of expenses.

So, how is the government planning to ‘level the playing field’?

One of the planned adjustments is to remove the presumption that LLP members are self-employed in an effort to prevent taxpayers from using the structure to disguise an employment relationship.  Members or partners will be treated and taxed as employees if they receive a fixed salary or if they are not exposed to the risks and rewards of the fluctuating partnership profitability.

Another suggested change plans to reduce the flexibility of distributing the profits and losses to different members, therefore restricting the current ability of partnerships to allocate profits on a tax driven basis.

We will try to keep our clients up to date with how these debates are developing and the response and comments from the tax professionals as the treasury begins to firm up its views on the proposed legislation.