The UK tax authority, HM Revenue & Customs, has launched a crackdown on businesses operating as limited liability partnerships (LLPs), potentially leaving private equity houses and professional services firms with significant liabilities. This crackdown follows changes to tax rules affecting businesses operating as LLPs, creating uncertainty among firms and the potential for backdated contributions. Some firms are considering mounting a legal challenge against HMRC’s new approach to the “salaried member” tax rules.
Businesses that may be affected by the change in treatment include US private equity groups like Blackstone and Carlyle Group, as well as law firms and accountancy businesses. The amount of potential additional liability for firms could be substantial, particularly for high earners who are LLP members. HMRC’s unexpected change in approach has caught many firms off guard, leading to concerns about the financial impact on affected businesses.
The LLP crackdown comes at a time when industries like private equity are already facing the possibility of higher tax rates if a Labour government wins the upcoming general election. Labour has proposed increasing the tax rate on carried interest for private equity executives and reforming the tax regime for wealthy non-doms. This adds to the challenges faced by businesses already grappling with the impact of HMRC’s tax scrutiny on LLP arrangements.
HMRC’s investigation focuses on whether some LLPs have misclassified members as self-employed, resulting in lower tax payments. Rules introduced in 2014 set criteria to determine whether individuals are considered self-employed or employees, requiring firms to pay National Insurance contributions for employees. This change has led to LLPs reevaluating their partnership structures and capital contributions to avoid being classified as salaried members.
The move by HMRC has raised concerns and drawn backlash from affected sectors and their trade bodies. Organizations like the British Private Equity and Venture Capital Association and the Law Society have voiced opposition to the change, emphasizing the need for forward-looking tax policies that promote competitiveness and support businesses. The Law Society has requested the withdrawal of the changes and called for proper public consultation before implementing any further alterations.
Overall, the shifting tax landscape and HMRC’s crackdown on LLPs have created uncertainty and challenges for businesses in the private equity and professional services sectors. Firms are urged to stay informed and seek guidance to ensure compliance with tax regulations while navigating potential liabilities and legal implications. The outcome of HMRC’s investigations and any legal challenges by affected firms will have significant implications for the UK business landscape.
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