HMRC attacks LLPs as “Tax Avoidance”


At least that’s the view in a report recently published by the Office for Tax Simplification (OTS). In the review of the tax treatment of 420,000 businesses the authors came to the conclusion that HMRC generally treats partnerships and LLPs in particular, as if they were exclusively “avoidance vehicles”!

In the report, the authors said: ‘Echoes of this came in some of our meetings with HMRC staff, though at senior levels HMRC are categoric that this is not the case” and that the issue of Partnership taxation and LLPs eas “one of the most sensitive issues”.

‘The debate over the anti-avoidance provisions relating to partnerships may well have had a part to play in this, as they were clearly in the minds of many commentators. At the same time, the views expressed by partnerships and agents were deeply felt and were clearly long-held.

‘There is a need for balance here and our point above about a more strategic approach to partnerships, in effect demonstrating that partnerships are indeed viewed as ‘legitimate commercial structures and the majority do not…manipulate business profits’, may well help reassure relevant businesses and help develop better relationships and balance,’ the authors wrote.

The OTS concluded that there is considerable scope for simplifying the tax rules for partnerships, after studying the rules affecting 420,000 business partnerships in the UK as part of its latest review to simplify the tax system. The report also found that the ‘one size fits all’ approach to the taxation of partnership creates complexities and burdens for small partnerships when compared to sole traders with similarly-sized businesses. In addition, HMRC was found to have no particular coordination or support around its partnership work and its guidance was criticised for not being in one place.

‘Partnerships currently cannot file their return on-line with free software, unlike other businesses. When taxes apply to partnerships they often involve special calculations, but HMRC does not currently have a single contact point where partnerships and their advisers can go for the specialist advice they require,’ the report said.

Among the report’s recommendations for ‘quick fixes’ are bringing together all HMRC’s partnership guidance in one place, providing free filing software so partners can file their returns like other individuals and publishing a ‘model partnership’ agreement.

Longer term issues recommended by the OTS for further study include making late filing penalties fairer, simplifying how partners’ personal expenses are accounted for and smoothing some of the tax tripwires partnerships face internationally. The OTS is also keen to reduce administrative burdens, for example, by doing away with partnership tax returns for small partnerships.

John Whiting, Tax Director of the Office of Tax Simplification, said: ‘We have been struck by the number and variety of partnerships: some 10% of UK businesses with total annual turnover of £150bn, ranging from the classic two-person firm through medical partnerships up to the ‘Big 4’ accounting firms, but also including increasing numbers of ‘City’ investment arrangements. The tax rules try and cope with them all and whilst the system broadly works, it’s creaking.’

It’s been clear for sometime that LLPs are in the spotlight of HMRC and there have been numerous ‘musings’ from the Revenue about the tax treatment of LLP members and other perceived benefits that can be derived from these structures. However, the fact remains that the rules are in place and for HMRC to treat any business structure in a less favourable manner than any other cannot be right. Clearly there is scope for simplification of the regulations as highlighted in the OTS report but HMRC’s current stance has put significant uncertainty into the marketplace which cannot be helpful for business, or the tax authorities themselves.

For a review of your business structures, or guidance on any accounting or taxation issue, contact your local Burgis & Bullock office on 0845 177 5500 or contact us online.

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