By Lyndsey Hall
The Chancellor’s Autumn Statement on December 5th set out a £1bn plan to crackdown on tax avoidance and prevent companies from disguising employment as self-employment, avoiding tax and National Insurance (NI). The changes suggested by Osborne could have a negative effect on partnerships and limited liability partnerships (LLPs), as HMRC believes that many of these companies exist primarily, if not only, to facilitate avoiding NI contributions on the income of “partners”, who are, in reality, employees.
LLPs are partnerships that are registered at Companies House for limited liability, protecting the individual partners from losing personal assets if the business fails, in the same way that a limited company protects its shareholders. Limited companies are taxed twice – once when the company pays corporation tax on profits, and again when the shareholders pay income tax on dividends. Partners in an LLP are taxed as though they are self-employed.
Osborne is intending to remove the current NI exemption enjoyed by LLPs, estimated to be worth £365m for the Treasury, and any profit allocations attributable to partners who are deemed to be employed will also be subject to employer NI at 13.8%.
As mentioned in our previous blog post, there are many illegal schemes that allow companies to avoid paying income tax and NI contributions, however not all LLPs are solely established for this purpose. An LLP is still likely to be the more tax efficient option for those who are entitled to a high amount in profits than a Limited Company, even when completely legitimate. Although the income tax and NI liability of a shareholder in a Limited Company will not differ much from a partner in an LLP, the amount of employer NI contribution due for a Limited Company is 13.8%, whereas self-employed LLP members are only liable for 9% on profits between £7,606 and £42,475, and 2% on anything above this.
In the past, companies could enjoy the benefits of both LLPs and Limited Companies by way of a service company, which provided services to the LLP in return for an arm’s length fee. However, after the Autumn Statement, it appears the government is going to move forward with plans to tackle the use of corporate partners, restricting profit and loss allocation in mixed partnerships.
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