The House of Lords Economic Affairs Committee’s Finance Bill Sub-Committee (FBSC) has published its report on their review of the draft legislation on partnership and LLP taxation. The Committee says it is still not clear what the right approach is, but they have recommended that:

  • HMRC should delay implementation until 2015 to allow businesses to adapt to the proposed changes;
  • A fuller consultation be carried out to target the legislation properly; and
  • It should include overseas LLPs.

This may all be too little and too late for many firms who have already spent hours of management time and professional costs, but we endorse the FBSC findings and urge HMRC to listen and respond quickly.

The question now is simple: will HMRC listen?

However, on the back of the publication of the revised draft 2014 Finance Bill last Friday, which gave a three month grace periods for funding requirements, we are concerned that HMRC has now reached a point of no return.

The House of Lords Economic Affairs Committee’s Finance Bill Sub-Committee (FBSC) has recommended that proposed changes to the taxation of Limited Liability Partnerships (LLP), due to come into force from 6 April 2014, should be delayed until 2015 to allow businesses to adapt to the changes and for a fuller consultation to be carried out to target the legislation properly.


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The Government proposes introducing legislative tests to determine if an LLP member is an employee or truly a partner. Failing these tests would make the member liable for income tax and National Insurance Contributions (NIC) as an employee and the LLP would pay employer NICs.

Nearly all the evidence received by the Committee was that the legislative tests failed to achieve the policy objective. Many, including Baker Tilly, suggested that existing case law could be used instead.
The Committee also raised concerns that the proposed changes to tax arrangements for LLPs would apply only to UK registered LLPs and not those conducting business here but formed outside the UK. The report urges the Government to reconsider the position of non-UK LLPs.

The Committee is content in principle with proposed measures to counter shifting of profit to corporate members of partnerships to minimise tax liability and highlights the extent of this practice in the Alternative Investment Fund Management (AIFM) Sector. But the Committee wants to see the legislation drafted more precisely.

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. Is HMRC at a point of no return? We think so, but welcome the Lords’ support of the professions’ concerns.

Lord MacGregor, Chairman of the House of Lords Economic Affairs Committee acknowledged that the Government was right to look again at the taxation of LLP members as he felt the legislation introduced in 2000 failed to bring their tax treatment in line with that of general partnerships, and provided opportunities to avoid tax liabilities.

While the Committee supports the need for change they also accept that Government has created difficulties by substantially changing the nature of the original proposals at a very late stage in the Consultation process. As defects in the 2000 legislation have led to the present problems, they are concerned that it would be a mistake to run the risk again of not getting the legislation rights a second time round.

Baker Tilly and other professionals gave evidence to the Committee highlighting that the tests in the proposed legislation would not meet the policy objectives. There is also the practical problem for many firms that the start date of April 2014 does not accord with their accounting periods and would take effect when the Bill had not yet had its parliamentary scrutiny. HMRC have ignored this completely in the revised legislation.

For the above reasons, the Committee members have proposed delaying this part of the Bill until April 2015 in order to resolve the difficulties drawn to their attention. It was also suggested that a case law test used for general partnerships would be a better approach, which has been our recommendation since the initial consolation started back in May of last year.

The Committee was also concerned that the draft legislation on mixed membership partnerships is not drafted sufficiently precisely and has urged HMRC to remedy this.