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Is partnership tax review using a 'sledgehammer to crack a nut'?

Is partnership tax review using a 'sledgehammer to crack a nut'?

The government's decision to review the taxation of partnership structures has been likened to 'using a sledgehammer to crack a nut' by industry professionals.

Their comments come in the wake of the Autumn Statement, in which the government announced it would press ahead with a review of the taxation of partnership structures where corporate entities are set up to act as additional partners, and are generally taxed at lower rates than individuals. The structure is seen as an efficient way to pay less tax on money that needs to be reinvested in the partnership as working capital, although some suggest that these have been used as tax avoidance schemes. 

The government has pressed ahead with the review, in spite of pressure from the asset management industry. Dominic Johnson (pictured), deputy chairman of New City Initiative and CEO and founding partner of partnership Somerset Capital Management which has 11 partners, expects the crackdown will prove harmful for LLPs.

‘It will hit larger organisations more than smaller ones, because that is where the complex discussions take place,’ he said, pointing to private equity firms.

The issue, Johnson says, is that running an LLP structure is currently becoming less and less desirable in the financial sector, despite helping to reduce capital risk.

‘Partnerships did not go bust to nearly the same rate during the financial crisis as limited or listed companies, because of the shared management,’ he explained. ‘To some extent they are trying to use a sledgehammer to crack a nut, and that is frustrating for firms like mine that are going about their business in a very legitimate way.’

This view is shared by Robert Mellor, asset management partner at PwC, who described the decision to take the proposals forward as ‘a blow for the asset management industry’.

Mellor said he was disappointed by the fact that HMRC has back-tracked from a consultative process and decided to undertake the early introduction of elements of the partnership taxation anti-avoidance legislation in its Autumn Statement.

‘It seems a very short journey from the March Budget, where the Chancellor set out the government's support for the asset management industry in the UK, to today's Autumn Statement which targets asset management firms structured as partnerships,’ Mellor added.

On a more positive note, founder and senior partner David Scott of LLP Vestra, said he was not overly concerned about potential changes to the way that partnerships are taxed.

‘A partnership is like a lot of these things that have gotten abused to a certain extent,’ he conceded. Nonetheless, he hopes that HMRC will not go beyond the proposals and ‘destroy the concept of what a partnership is’.

Implementation-wise, Scott says the government should separate partnerships that have a limited company that invests in the business, and those created to divert profits, which he says should be easy to look into.

For George Bull, senior tax partner at Baker Tilly, the government’s next step will be to target partnerships which have individual members but also limited company members.

‘There is a fairly common structure, where the corporate member will pay lower rate corporate tax than the individual members. This is used to retain profits and reduce reliance on bank borrowing.’

Bull explained he ‘understood’ why members would do that, but said he wanted LLPs to be free of members who used such structures to reduce their tax bills.

In spite of the concerns that Johnson has about the unintended consequences of the new rules, he is broadly supportive of the decision to make LLP structures more ‘legit’.

‘There is nothing wrong with the attempt to make them more transparent, and make sure tax dodgers are put aside. It is great that Treasury is genuinely encouraging enterprise.’

‘What would be helpful would be to have a sort of scheme which would ‘approve’ partnership, and under which the anti-avoidance rules wouldn’t apply. If we knew we could run our business in a nice and clean fashion and get on with it/ that would make life a lot easier.’

More details are set to be announced in new week’s Finance Bill.

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