HMRC proposes crackdown on LLP ‘disguised employment’

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Some members of limited liability partnership (LLP) firms could face higher tax and national insurance deductions under government proposals for tackling ‘disguised employment’ published this week.

The consultation follows an announcement in the budget that the government would examine removing the presumption of self employment for LLP members.

A consultation document published by HM Revenue & Customs says: ‘There is evidence that LLPs are increasingly being used and marketed’ as ways to avoid taxes.

‘The ability to use LLPs to disguise employment was never intended and gives rise to significant scope for the avoidance of employment taxes. If left unchecked these arrangements will continue to distort the LLP purpose and ultimately threaten its future use.’

Under the proposed changes, LLP members will be liable for employee income tax and national insurance contributions if they meet tests for being employed on a contract of service.

The most significant indicator is where a member ‘has no significant entitlement to reward’ when the LLP makes a profit and suffers ‘no significant downside’ if the LLP makes a loss.

The consultation also proposes legislation to prevent partnerships from manipulating profit and loss allocations for tax advantage.

It warns that ‘arrangements entered into to exploit any loophole or shortcomings in legislative provisions’ may fall foul of the HMRC’s general anti-abuse rule aimed at tax avoidance schemes.

George Bull, chair of professional practices group at accountants Baker Tilly, described the proposals as being ‘far too complex’ and imposing uncertainty.

The consultation closes on 9 August.

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