HMRC have published their consultation document on LLP taxation and, predictably, they are targeting the use of contrived LLP ownership structures to avoid tax. These schemes involve the paying of significant profits to corporate members which make little or no contribution to the firm’s profits.
As HMRC point out “the allocation of profit to the company reduces the income tax payable and because of rate differentials or other arrangements in which the companies are involved, is claimed to give rise to a significant overall tax saving. In the most aggressive cases, it is claimed that no tax at all is paid either by the company or the individual members when they access the profits.”
HMRC consider that these schemes create ‘unfairness’ and claim to have seen an increase in the use of such schemes , particularly by professional firms and have become concerned that they will proliferate if no action is taken.
There has already been a public response from some tax advisers who have pointed out that a corporate member might have a useful role to play, for instance in holding intellectual property or other assets to ring fence them from the LLP or perhaps to use on joint ventures, other projects, or as an investment vehicle. It may be that HMRC will relent on allowing the use of corporate members which have a genuine business use.
However, there is little doubt in my opinion that they will challenge the use of multiple corporate members by professional firms to replace individual members (for example, having John Smith Limited rather than John Smith as the member). I have been seeing an increasing trend for the smaller professional firms to rearrange their LLP structure in this way. This does not fit well with the statements on some of their websites about their mission, values and their corporate social responsibility.
It looks as though the time will soon be up for those firms with contrived LLP structures and their members will be obliged to join the rest of us in paying our fair tax.
If there is a change, this will take place from next April and those firms will need to change their membership structure by reintroducing individual members. They will also need to start budgeting for the higher tax payable and reduced members’ drawings.
Ominously, HMRC have commented that “many of these arrangements do not work” and that any arrangements that exploit any loophole in legislative provisions may fall foul of the general anti-abuse rule. It would be an even bigger worry if HMRC challenge the efficacy of some structures and reassess the individual members for additional tax.
For further information on any of the issues above, please contact Jeremy Orrell, head of our corporate team on 0844 391 5829.