Have your say on partnership taxation
HMRC has published a consultation document on partnership / limited liability partnership (LLP) taxation setting out proposals for tackling tax avoidance. The proposals could substantially affect the amount of tax that some partnerships pay. We would appreciate your comments on the proposed new rules and would be grateful if you could take a minute to answer the following questions.

Your answers will be used to inform BDO’s response to the HMRC consultation and may be used to highlight important messages more widely, however, all your input and comments will remain strictly anonymous.
About your firm

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* 1. Sector

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* 2. Number of partners

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* 3. Business type

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* 4. Does your partnership / LLP include both individual and limited company members?

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* 5. LLPs - Tackling "disguised" employment

HMRC currently follows the automatic presumption of self employment for LLP members if registered at Companies House. This ignores the member’s actual status, profit share entitlement, voting rights and capital invested in the LLP. HMRC says this facet of LLPs is being abused to avoid NIC by “disguising” individuals as partners when, in reality, they are employees. Therefore, the Government plans to remove this presumption of self employment.

How should HMRC judge if an LLP partner is an employee?

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* 6. Deciding LLP member employment status

HMRC is consulting on using its non-statutory employment status manual test first and, if this does not establish employment, then use a second test to prove that a member is an employee based on the financial benefits that member receives or the risk that member takes.

Is this approach...

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* 7. If there were only to be one test, which would you find more straightforward to apply?

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* 8. Using financial risk to decide LLP member employment status

HMRC suggests that the second leg of its test to classify a member as an employee should be based on the financial risk an individual takes, including:

(A) the member’s capital risk (loss of capital or repayment of drawings) in the event that the LLP makes a loss or is wound up
(B) entitlement to a share of the profits, and
(C) entitlement to a share of any surplus assets on a winding-up

Other tests, based on historic partnership case law and the recent case of Tiffin v Lester Aldridge [2012] EWCA Civ 35,could include:

(D) voice as of right in the management of the LLP
(E) is a signatory to the Members Agreement

Which combination of these should be taken into account?

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* 9. If only this leg of the test was used, would it mean that everyone thought of as a partner would be taxed as a self employed person?

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* 10. Level of risk

HMRC proposes to ignore any risk-dependent profit share that is considered insignificant (for example a 5% or less profit share that varies according to partnership performance is likely to be considered insignificant).

Is this approach right?

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* 11. Artificial profit allocation

The Government is also targeting certain partnerships with mixed members (typically companies and individuals) where profits are allocated to a member that pays a lower rate of tax than the others. It intends to counteract this by making a ‘just and reasonable’ reallocation of part or all of the profits so that more tax is paid.

Should HMRC have the power to reallocate the profits of a partnership for tax purposes?

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* 12. Limited company partner

Some firms use a Limited company partner to help fund the firm’s activities (as groups of companies often do). HMRC states that firms retaining working capital by means of a corporate partner effectively gives access to cheap (i.e. taxed at a lower rate) capital.

Is it right for HMRC to seek to prevent professional service firms from funding their firms in this way?

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* 13. Complexity

The Government says these proposals will increase tax collection by around £300m a year. Is the complexity and administrative upheaval these proposals will create justified to collect this amount?

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* 14. Impact

Will these proposals damage the attractiveness of using partnerships and LLPs?

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* 15. Please enter other comments on the proposals here.

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