The House of Lords Finance Bill sub-committee has called for the government to delay its limited liability partnership tax reforms following critical evidence from the Law Society about the impact on solicitors.
The Finance Bill sub-committee (FBSC) argued that a postponement until 2015 is necessary to allow business to adapt to the changes and for a fuller consultation to be carried out to target the legislation properly.
The government plans to introduce legislative tests to determine if an LLP member is an employee or a partner. Passing all three tests would make the LLP member liable for income tax and national insurance contributions (NIC) as an employee while, at the same time, the LLP would also be required to pay employer NICs.
Commenting on the Draft Finance Bill 2014, the House of Lords committee said that almost all the evidence they received supported the view, shared by the Law Society, that the proposed legislative tests to determine whether an LLP member was really a partner do not achieve the government’s policy objective.
Law Society chief executive Desmond Hudson said:
“We are pleased that the House of Lords has listened to our concerns and urged the government to delay changes to LLP tax rules, which could have serious financial implications for solicitors who practice as part of LLPs. We oppose these changes and have made numerous representations to government, underlining that the new rules are far too broad and will unfairly impact partners practising as part of an LLP by comparison to those in a general partnership.
“The House of Lord’s conclusion mirrors the evidence given last month by the chair of our Tax Law Committee, Gary Richards, that the government should give urgent consideration to delaying these provisions until next year to allow for further consultation on alternative approaches and reduce the administrative burden on LLPs.”
The Report further echoes Law Society comments, that the government should align its policy on non-UK LLPs because the current approach could put UK LLPs at a competitive disadvantage.
Des Hudson added: “The report quotes the Law Society’s evidence directly on this point, where we said that what started as a moderate and sensible proposal to counteract obvious tax avoidance has become a widespread attack on a business model which is of central importance to the legal profession and an increasing number of other businesses.
“Any changes should align the tax treatment of members of LLPs with that of partners in a general partnership and go no further. There are better and simpler, ways of achieving the stated policy objective. It was telling that the report criticised HMRC as 'unable or unwilling' to identify how much extra tax was to be raised from this measure, which suggests that the delay called for by their Lordships could easily be accommodated. We are hopeful that HMRC will accept the force of these criticisms with good grace and follow the report’s core recommendations.”
The Law Society is preparing a practice note and guidance to help LLPs and their members to arrange their finances to fit with the proposed legislation.
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