UK GPs not ready for LLP changes

Under-prepared UK-based GPs could be on the hook for more taxes due to changes in the UK's limited liability partnership regime, advisers say.

UK-based GPs must act quickly or face a tax hike and other potential consequences from changes to the UK’s limited liability partnership (LLP) regime proposed by the UK tax authority, HM Revenue & Customs (HMRC), according to market sources.  
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HMRC is challenging a popular private equity LLP structure that 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.  

“From my conversations, I don’t think it has fully dawned on everyone just how far-reaching these changes will be,” tax advisor Laurence Parry, a former HMRC tax anti-avoidance official now with HedgeStart, warned in a statement.

Parry also said the description of HMRC's consultation process is a “misnomer”; HMRC will press ahead with the proposed changes and therefore they need to be “taken seriously”. 

However, Dechert tax lawyer Mark Stapleton said the consultation process had seen some “push-back”, both from the private equity industry and other professional services firms structured as LLPs, so there was no need to panic into making changes. However, he agreed that private equity firms should be thinking about the rules and planning alternatives.

“The new legislation isn’t going to have effect until April next year. So while it makes sense to start thinking about the potential impact of the proposals, let’s see what comes out of the consultation process and draft legislation before making any changes.”

In a separate proposal, the consultation also takes aim at partners in an LLP that tax authorities deem “salaried members”. Currently the tax code interprets all partners in an LLP as self-employed, entitling them to pay lower national insurance contributions. 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.  

However, Stapleton does not see this as a significant issue for most private equity firms. “Although we need to await the specific legislation, we have always tried to ensure that when a partnership structure is established the people who are going to be partners are genuinely partners.”

“For example, they would have made some sort of capital contribution and would be people who are significant to the business. We know that HMRC are particularly concerned about firms where they have hundreds of partners including the cleaners and the secretaries.”