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HMRC release consultation challenging tax planning involving partnerships

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23 May 2013

There has been a lot of noise about the Government’s proposals to rein in abusive tax planning using Limited Liability Partnerships (LLPs). The long awaited Consultation Document was finally published this week.  It should be noted that this is only a consultation and not even draft legislation.  This alert will focus on the content of the ConDoc – we will post an update after we have digested the proposals fully.

The changes are framed in the context of the overall drive towards ‘fairness’ in taxation and therefore purport to focus on the commercial reality behind a legal construct. Unfortunately, as  others have already commented, normal commercial arrangements may be affected as a result.

The proposals are set to come into force from 6th April 2014 and are split into 2 main measures…

Disguised Employment

HMRC are asking when is a partner not a partner? When they are really an employee or ‘salaried member’.

The ConDoc looks at the tests and focuses on, among others, highly paid individuals in professional practices, bringing miscreants into the employee taxation net.

An individual LLP member will be a “salaried member” if either:

  • He would be regarded as an employee per the Employment Status Manual guidance i.e. the usual test for employment vs. contractor , or
  • He has no significant exposure to economic risk (lost capital or repayment of drawings), profits or surplus assets

Significant will be 5% of fixed profit share in this instance.

There will be a Targeted Anti-Avoidance Rule (TAAR) to ignore arrangements that aim to circumvent these rules.

The few words of comfort here are that HMRC do not intend this to catch people who are properly making their way in the professional world and are taking a first step as a salaried partner. How this will be applied remains to be seen and will doubtless be the subject of correspondence in the consultation.

Profit and Loss Allocation

This element is considerably more complex and will need more consideration but essentially HMRC attack “mixed membership” partnerships i.e. those with members who pay income tax and some that do not.

The targets of the amendments are:

  • Structures where profits are allocated to a member that pays a lower tax rate than other partners and in whom those partners have an economic interest.
  • Structures where losses are allocated to those who have a higher rate of tax than other partners
  • Structures where profits are sold between partners to avoid tax.

We are looking at all three scenarios but initially, with respect to the attribution of profit to, for example a corporate partner, the rules simply seek to reallocate the profits to the individuals on a just and reasonable basis.  This will apply where there are “reasonable” grounds to assume that the main purpose of the structure or one of its main purposes is obtaining an income tax advantage.

In a case where a loss is allocated and a similar reasonableness test is passed the loss relief will be denied.

Although the document recognises the commercial desirability of corporate partners being used for financing and indeed other reasons it simply says that this is outweighed by the potential unfairness of current practice. On the upside, HMRC accept this will not affect family arrangements


None of these changes are in force and the consultation is open until August. We will be contributing to the debate in order to make the commercial implications of the proposals clear. We will also be publishing our thoughts as they develop but in the  meantime please speak to your normal tax contact if you wish to add your comments or have any queries.