In depth: LLPs dodged a bullet in the budget - but HMRC is on their case

Law firms will have shared the Law Society’s relief that chancellor John Healey’s budget resisted any temptation to meddle with LLP partners’ tax status. However, a reason Healey may have left the idea on the shelf could be that HMRC, emboldened by the Supreme Court, is already acting on what it sees as abuses. 

Last summer’s ruling in BlueCrest confirmed that under the salaried member rules, LLP members can rely on self-employed status for tax purposes only where they are exposed to risks associated with partnership profit, capital contribution and influence over partnership matters.

The Gazette understands that, following the ruling, HMRC is putting professional services firms under aggressive scrutiny. The UK arm of elite consultancy the Boston Consulting Group is among those targeted, the Financial Times reported this week. The group commented: ‘We comply with all of our global and local tax obligations wherever we operate. As set out in our latest UK LLP accounts, we are currently in discussion with HMRC and will not be commenting further while those discussions are ongoing.’ HMRC would not comment on any individual investigations. 

'The amount of tax at stake could be material for law firms if they fall foul of incorrectly assessing the self-employment status of their members'

Andrew Allen, PKF Francis Clark

Meanwhile, law firms are looking hard at their members’ agreements to ensure they fit the definition. Experts warn that the consequences of getting it wrong could be more severe than finding future profit-shares liable for employers’ national insurance contributions. ‘HMRC could seek to impose the charge (along with penalties and interest) for earlier years if a review in light of the judgment could impact a member’s status,’ said Andrew Allen, partner at accountants PKF Francis Clark. ‘Consequently, the amount of tax at stake could be material for law firms if they fall foul of incorrectly assessing the self-employment status of their members.’ 

Allen and his colleague Anne Gardner-Thorpe warned that the ability to demonstrate a member’s influence over the LLP business is harder following BlueCrest, particularly for larger firms. Despite this, it is unlikely that existing firms will want to give up the benefits of the LLP structure, they said. But any remuneration policy that does not expose all members to the risks and rewards of sharing the profits of the business in any given year ‘should be reviewed carefully’.

According to Allen and Gardner-Thorpe, practical steps being taken by law firms include looking at:

• Business-driven capital levels. Ensuring the capital contributions of members are supported by evidence-based methods of assessing total capital required by the firm, considering aspects such as their working capital needs as a business and debt appetite.
• Capital bandings. Some law firms closely align capital levels to meet the capital contribution condition and track future capital movements to continue to comply with the conditions. Where firms have adopted such approaches historically, they have been looking at changes to their arrangements, often using capital bandings for members linked to overall capital funding needs for the whole LLP.
• Capital contribution timings. There are rules to consider surrounding the timing of the contributions of capital both for members joining an LLP and those where increases in capital might be required from time to time. Many firms are concerning themselves with compliance with these aspects.
• Disguised remuneration. This often misunderstood term does not just mean ‘a headline fixed share’ – it can be far wider than this and will most often capture any allocation to a member which is a reward for their personal contribution or performance in the business rather than being based on the performance of the business as a whole. Aspects such as notional interest on capital and performance bonuses can often represent additional disguised remuneration. 
• Reviewing members’ agreements. A wide range of matters covered in members’ agreements are impacted by the BlueCrest decision, particularly where members rely on demonstrating influence in the business to support their self-employment status. 
• Structural reviews to ensure the right individuals are members and that appropriate provisions are in place to reward and sanction them, including by removal if necessary. 

An HMRC spokesperson said: ‘The Supreme Court’s decision provided helpful clarity on how the salaried member rules should be implemented. We want to make sure everyone gets their right tax, and we are considering if any updates should be made to our online guidance to help them do this.’

However, the nuclear option of changing the tax status of all LLP members remains. As Law Society director of public affairs and campaigns David McNeill points out in this week’s Gazette podcast, the Treasury does not throw out discarded policies – they remain on the shelf potentially to be taken down later.