Vestra founder and senior partner David Scott (pictured) has welcomed chancellor George Osborne’s decision to press ahead with the government’s review of the taxation of partnership structures.
‘Certainly partnerships have been an arrangement for some people using a corporate member of the partnership as a way of saving tax, and I think Osborne is right to hit at that, and I have no problem with his decision at all,' Scott, who founded LLP Vestra, told Wealth Manager.
His comments follow the Autumn Statement, in which the government said it would look into 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.From what he can gather from the statement, as long as a firm or fund structure is capable of proving it has an 'economic risk, or a risk of capital loss', review implications will be neutral.
'I don’t think Osborne’s crackdown would affect us [at Vestra]. All of us have economic risk and we haven’t tried to make people partners just to get national insurance.'
Nonetheless, he conceded he did not want the Chancellor to go beyond the proposals and ‘destroy the concept of what a partnership is’.
He also expects businesses that have a ‘mixed’ partnership arrangement, where there is an investor in the partnership, could find it difficult to sustain growth.
'You wouldn’t want [tax avoiders] to be a reason to invalidate the whole tax treatment of the main partnership. Otherwise, that would limit the ability of partnerships to really get outside capital from corporates, which could stifle growth.'
Secondly, he says dual contracts - which are used by banks - could be hit. Dual contracts are used when, for example, a firm has a member of staff employed by its London operation alongside an offshore entity.
'Some partnerships have a service company through which all the staff gets paid. If the cost of the salaries was £100, they maybe got £105 deduction. Effectively, it was as if the service company was offering a service to the partnership.
'Whenever you have got movements between various subsidiaries of companies, there is this thing called transferable pricing. There was also a slight benefit in doing that because you could get more of a deduction.
'We have always avoided the temptation to use that, because we felt it was slightly artificial any way,' he conceded.
Finally, there are implications for corporation tax too. 'If you and I are in partnership we pay 45% tax, but if you decide to do that purely to avoid corporation tax, you had the ability to transfer some of those profits to a limited company that was a partner within the partnership. That would take corporation tax off' he explained.
'If you have created a limited company just to divert profits, then that should be hit. I’d be supportive of that,' Scott added.