Controversial measures aimed at cutting tax avoidance by members of limited liability partnerships should be put on hold for further consultation, according to the House of Lords body scrutinising the Finance Bill.
The new rules, which would require LLPs to tax members as employees unless they can meet tests to prove their status as partners, are due to come in to force in April. Critics, including the Law Society say they will damage the City and fail to recognise the legitimate role of LLPs.
In its report on the Draft Finance Bill 2014, the House of Lords Economic Affairs Committee says that implementation should be delayed by a year. It says the measures are so different from those consulted upon over the summer that more time is needed to get the legislation right.
Delay would also enable businesses to adapt to changes in treatment.
The committee accuses policymakers of paying ‘scant regard' to the effect on partnerships of tax policy changes, despite the importance of partnerships to the UK economy. It notes that the government’s strategy for developing a competitive UK business tax environment ‘focuses entirely on corporate tax, sometimes at the expense of partnerships'.
Tax advisers welcomed the committee's report but questioned whether the government would listen. ‘We are concerned that HM Revenue and Customs has now reached a point of no return,' said George Bull, chair of professional practices group at Baker Tilly Tax and Accounting.
‘Firms have already invested considerable amounts of management time and professional fees in an attempt to address the draft legislation and manage the impact the legislation may have on their firm.
‘Only last Friday HMRC published revised draft legislation in the form of the Finance Bill 2014, giving firms a three-month grace period for funding arrangements.'
Louis Baker, head of professional practices at accountants Crowe Clark Whitehill, said: ‘There has been a breakdown in the consultation process. Hopefully the government will now listen to the voice of reason from their lordships.
‘However, there are only four weeks to go until the planned implementation date so it is exceptionally frustrating that there is still uncertainty over the position. With only a month to go there are still ongoing discussions with HMRC over aspects of the detail.
‘It is shocking really and demonstrates this is all being done in too much of a rush.'
A spokesperson for HMRC said the new measures would come in to force as scheduled. 'The new rules which will come into effect from April will deliver a fair outcome for taxpayers by ensuring those who are in reality employees are treated as such for tax purposes protecting over £3bn in tax.'
Law Society chief executive Desmond Hudson said: 'The House of Lords' 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.' 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 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.