The Law Society will today warn parliament about damaging consequences of new partnership tax rules due to come into force in April.

Critics of the measures – designed to cut tax avoidance in limited liability partnerships – say they will put UK-based partnerships at a disadvantage and could even imperil the City.

However a prominent Conservative politician, former minister John Redwood, said last week that such calls are unlikely to persuade politicians committed to tackling tax avoidance.

An HMRC consultation on proposals to treat members of LLPs as employees for tax purposes unless they pass three set conditions ends tomorrow. The new regime would require firms to pay higher national insurance contributions and members to be taxed as employees.

Gary Richards, chair of the Society’s tax law committee, will today tell the finance bill sub-committee of the House of Lords that the measures will harm professional firms that operate as LLPs for genuine business reasons. He accused HMRC of ‘persistently describing the tax consequences of the current rules as avoidance in an attempt to justify changes that go further than are needed to counteract perceived national insurance benefits’.

In written evidence submitted last week, the Society said the new approach would create an inconsistency between UK and foreign LLPs which would put UK LLPs at a competitive disadvantage.

Martin Shah, tax partner at City firm Simmons & Simmons, said the measures were already having an impact on law firms, for example requiring them to raise capital from members. ‘If they are promulgated in the form set out it will lead to decisions being made for tax reasons rather than commercial reasons.’  

Dominic Johnson, deputy chair of the New City Initiative, an alliance of City business, said the changes might encourage businesses to choose limited company rather than partnership status, which he said would increase systemic risk in the financial sector. ‘If you meddle with the structure of LLPs you increase risk,’ he told a debate organised by the initiative last week.

However Redwood said that the critics would not succeed unless ministers could be shown that the changes would reduce the tax take. ‘You need to provide evidence that this is going to be the case, quickly,’ he said. He also urged critics to challenge ‘the view from SW1’ that tax avoidance is automatically a bad thing: ‘You need a concept of good and bad avoidance.’

HMRC is expected to publish final guidance on 17 February.

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