George Osborne’s tax crackdown on the partnership structure could see a raft of wealth firms leave these shores.
This is the warning from think tank New City Initiative (NCI), whose members include Killik, Fundsmith and Somerset Capital.
The partnership structure has been popular with wealth firms due to less stringent regulation and the fact partners have responsibility for how the business is run without interference from shareholders. According to NCI, the number of investment firms set up as limited liability partnerships (LLP) has doubled from 325 before the financial crisis to 750.
In his Autumn Statement, chancellor Osborne unveiled a package of measures targeting tax avoidance in a bid to raise around £7 billion. This included a clampdown in partnerships, with the chancellor arguing the model allowed hedge fund managers to reduce taxes on salaries and disguise company employees as self-employed partners to avoid income tax.
In a survey of its members the NCI found 50% of partnerships would consider moving to a corporate structure if the rules were imposed. This would slash their tax bill by 6% to 33% and cost the Treasury millions.
The survey also indicated firms could relocate overseas.
‘Changes in the tax treatment of partnerships could represent a significant loss to HM Revenue & Customs and lead to an exodus of profitable well-run investment managed firms’, said Magnus Spence, Dalton Strategic Partnership chief executive and chairman of the NCI, in the Sunday Times.
‘Partnerships have had a hugely positive impact on the City of London over many years.’
In a conference last week NCI deputy chairman Dominic Johnson said interfering with the structure could pose risks. ‘If you meddle with the structure of LLPs you increase risk,’ he said.
Killik & Co chief executive Paul Killik (pictured) added: ‘We simply plead for some stability in tax law – frequent changes are hugely time consuming and destabilising for us all.’
In July 2012 NCI argued partnerships were the best way to fix a 'broken' city. 'Owner managed asset management businesses is the best way of restoring trust in the City and the financial services sector more generally,' it said at the time. 'The NCI believes that more widespread and effective alignment of risk and reward between investment managers/advisers and their clients will bring mutual benefits to investors and the industry as a whole.'