LLPs remain under watchful eye - especially from the taxman

Despite dodging Budget day taxes, the UK’s limited liability partnership (LLP) model is still facing intense scrutiny, this time from HMRC, which just had a good result from the top court this week, writes Maria Ward-Brennan.

The LLP model, used by professional services such as law firms and accountancy firms, came into force 25 years ago. It is a structure in which members (known as partners) invest their own capital, take on the risk, and, in return, do not pay corporate tax on their profits.

In the lead-up to the Autumn Budget, there were whispers for weeks that Rachel Reeves was considering taxing LLP firms. For over a month last October, over 50,000 businesses in the UK faced the anxiety that they would be targeted in her speech. However, after heavy lobbying by the sector, including by legal bodies who said it made no “logical sense”, the proposal was dropped.

But the spotlight on LLPs did not turn off there; instead, it has shifted from the Treasury to the HMRC offices.

“The LLP model in financial and professional services is under coordinated assault,” says Miles Dean, head of international tax at Andersen.

There are two cases before the Supreme Court focused on complex tax issues at a firm with an LLP structure.

One of those cases had its decision handed down this week by the Supreme Court, which will send shockwaves through hedge funds, private equity firms, and professional services firms that use the same structure as HFFX LLP to avoid paying income tax on their bonuses.

Trading firm, HFFX LLP, owned by Russian-born British billionaire financial trader Alex Gerko, tried to lower its team’s tax bills by having a corporate partner hold their bonuses for three years before paying them out. HMRC wanted to tax this money immediately as regular profit, but the Supreme Court rejected that idea.

However, HMRC also argued that the money must still be taxed later on when the team actually receives the delayed payouts. The Supreme Court agreed with this backup plan, ruling that the payouts are taxable income once received, which was considered a success for HMRC.

The other case, pending a ruling by the UK’s top court, is that of hedge fund BlueCrest Capital Management, founded by the UK’s wealthiest financier, Michael Platt. This case centres on the salaried members’ rules, which determine if LLP members are genuinely self-employed or ‘disguised employees’ for tax purposes. The amount of tax at stake for BlueCrest if it loses at court is nearly £200m.

But if the decision on BlueCrest follows that of HFFX, HMRC would have won on every flank.

Dean told City PM, “behind the litigation sits the real threat of a ‘partnership NIC'”.

“Partners already face effective rates near or above 50 per cent, carry genuine capital at risk, and enjoy none of the protections available to employees. Taxing them as though they do would not be fair.”

“Rather it’s a revenue grab on a soft target, a strange way to treat the firms underpinning the UK’s standing in global finance and law,” he added.

Matthew Harrison, partner at Vialto Partners, added: “Most of these cases involve arrangements put in place over a decade ago, following a period of intense focus by HMRC on employment taxes. As a result of that focus, our employment tax code is extremely long and complex, and HMRC may have been a little slow to recognise that the same does not apply to partnerships.”

Eyes on the Law is a weekly column online and in the newspaper focused on the legal sector.