UK considers tax hikes on LLPs

UK private equity firms could face a tax increase after the government released proposals that would stop firms from reinvesting fund profits at the corporate tax rate.

UK private equity firms may move away from using limited liability partnership (LLPs) structures after the government unveiled plans to raise taxes on these flow-through legal entities.

The LLP structure allows fund managers to reinvest any profits the partnership makes at the corporate tax rate, via a corporate member, rather than the higher income tax rate as individual investors. This week UK tax authority HM Revenue & Customs (HMRC) released a consultation paper that seeks to prevent this tax strategy. 

“It could have a big impact,” said Dechert tax partner, Mark Stapleton. “I can understand measures that stop members attributing profits to the corporate member when the profits end up finding their way to individuals, but if you are going to say we are not happy with the profits being attributed to the corporate member and then being re-invested for genuine business purposes in the partnership, that is a problem.”

Stapleton adds this could lead firms to begin using corporate structure investment vehicles as a way of reinvesting “working capital” in a tax efficient way.

In a separate proposal, the consultation also takes aim at partners in an LLP that HMRC deems “salaried members”. As it stands all partners in an LLP are self-employed, entitling them to pay lower national insurance contributions.

However, in a bid to increase tax revenues, partners in LLPs that do not meet certain criteria will be treated as employees for income tax and national insurance purposes. A “salaried member” is one that: has no economic risk at stake, is not entitled to a share of the profits, not entitled to any surplus assets on a winding up, or doesn’t meet HMRC’s normal test of employment. 

“There are probably a lot of firms that have got partners that wouldn’t currently fit that description so it would mean a change for quite a lot,” said Stapleton.

If implemented the changes would take place in April 2014. The HMRC will receive comments until 9 August.