Yahoo Finance HMRC tax rule changes put professional service firms into limbo
The UK tax agency is looking into firms for potential backdates on tax, after HMRC rule changes to limited liability partnerships (LLP) businesses came into effect.
Private equity houses and professional services firms may be on the hook for hundreds of millions of pounds as a result of the changes, as reported by the FT.
HM Revenue & Customs (HMRC) put members of LLPs under the spotlight earlier this year after it updated its guidance on tax.
The new guidelines target salaried members on what tax contribution they pay – a change that affected the partner compensation at most firms.
Corinne Staves, partner at CM Murray explained: “The key consequence is that LLPs which rely on the contribution of capital to be confident that members are not taxed as employees need to review, and potentially change, their approach. Previously, members were taxed as employees unless they had (A) a significant variable profit share, (B) significant influence over the LLP, or (C) a substantial capital contribution (at least 25 per cent of annual fixed compensation)”.
“Many will recall that large groups of members contributed capital in response to these changes, especially ‘fixed share’ members who are often unable to meet the requirements in (A) or (B) because their compensation is largely fixed or they do not have any meaningful vote or participation in the governance of the firm.
“The new guidance, however, indicates that capital contributions made to maintain the 25 per cent threshold due to an increase in fixed profit share will be disregarded, requiring firms to review and potentially change their approach,” she added.
Most of the professional services industry falls under this rule, as law firms, accountancy firms, private equity and consultancies all operate as a LLP.
Jitendra Patel, tax principal at BDO told the FT that the HMRC are “effectively saying if you contribute capital to get out of the salaried member rules then that’s tax avoidance. It’s almost like a bit of a trap, in which you’re caught even if you risk your own money to try and comply with the rules.”
The FT has reported that unless HMRC softens its approach, firms affected by these changes are expected to mount a legal challenge.
Mike Hodges, partner at accountancy firm Saffery, told the publication that the HMRC’s change had come “seemingly out of a clear blue sky”, adding the amount of potential additional liability would be “significant”.
“There could be big numbers as by definition you’re talking about members of the LLP, who are likely to be among the highest earners and earning high amounts — so a significant employers’ National Insurance (NI) contribution,” he added.
