The government published its draft tax legislation yesterday, including policies announced in last week’s Autumn Statement, which aim for a “more transparent, efficient and simpler” tax system.
One of the unexpected changes is the new rule regarding deemed salaried members of Limited Liability Partnerships (LLPs).
Mark Saunders, tax director at PwC
It is all bad news for the salaried partners who are unexpectedly caught
To keep their current status, at least a quarter of their pay must be profit dependent, they must have contributed at least 25% of their fixed pay to the firm’s capital, or the third option is to prove they have significant influence on the overall partnership.
If partners are deemed to be employees then the employer’s national insurance contribution at 13.8% is due and other employment-related tax rules, such as benefits in kind and share scheme rules, will apply.
Partners will have to satisfy at least one of three tests to prove they are true partners in a business, eligible for a different tax treatment to employees.
These are significantly broader in scope than previously consulted upon and, according to KPMG, could affect partnerships with salaried partners where no thought had been given to tax efficient structuring.
Mark Saunders, tax director at PwC, said, “The chancellor is making this change, along with ‘mixed partnerships’ where there is a corporate partner, to raise over £1bn per year. So we are talking about a significant amount for the firms and partners affected. We're likely to see even junior partners trying to justify that they have significant influence on the partnership, and it will be hard to prove either way with something so subjective.
“Unfortunately, although the people affected will no longer be treated as partners for tax purposes, they won't get the employee law protections of ordinary employees, such as statutory redundancy pay. So it is all bad news for the salaried partners who are unexpectedly caught."
There are new specific anti-avoidance measures, including legislation to prevent employment intermediaries being used to avoid employment taxes by disguising employment as self-employment.
Charities will be prevented from claiming charity tax reliefs if one of the main purposes of establishing the charity is for tax avoidance.
Measures to stop high-earning non-domiciled individuals from avoiding tax by dividing the duties of a single employment into a UK and an overseas contract are to be introduced. From April 2014, UK tax will be levied on the full employment income where the division of duties and remuneration between a UK and overseas contract is artificial, and where tax is not payable on the overseas contract at a rate broadly comparable to UK tax rates.
David Gauke, exchequer secretary to the Treasury, said, it is “cracking down on aggressive tax avoidance.”
However, Alex Henderson, tax partner at PwC, said, “Interestingly the emphasis is now more on restricting reliefs rather than tackling tax avoidance, which tends to be simpler to achieve, and suggests we may have hit the high-water mark of tax complexity. A simpler tax system is more business friendly, so this trend is a positive development for the economy although those affected will see an increased tax cost.”
One of the measures is the new transferable tax allowance for married couples, meaning £1,000 of personal allowance could be transferred from one spouse to another, assuming neither is a higher-rate taxpayer and one is earning less than the personal allowance.
It has been questioned by BDO, which says HMRC is unlikely to deliver anywhere near the £800m windfall for taxpayers that the government anticipate because it will be too complicated for taxpayers to claim and for HMRC to administer.
Richard Rose, tax partner at BDO
Many will not realise that they are entitled to make a claim or will be put off by the complexity
HMRC anticipates that 4.1m couples will be eligible for a tax giveaway of up to £196 benefit per annum per couple, with 84% of the winners expected to be male spouses.
Richard Rose, tax partner at BDO, said, “Although details of how claims for the relief and how HMRC will deal with changes in circumstances that impact its quantification are yet to be announced, we expect that many will not realise that they are entitled to make a claim or will be put off by the complexity, especially when they are not used to dealing with tax matters.”
The new rules for partnerships are “tougher than expected”, according to PwC.
There is good news for small businesses, with business rate relief for small firms extended until April 2015, and caps on further increases to business rates set at 2% a year from April 2014.
A new tax relief for investment in social enterprise will be introduced from April, and a new occupation relief will halve rates for new occupants of retail premises.
There is also a new onshore oil and gas tax relief, which will support investment in the UK’s emerging onshore shale gas industry by applying a halved rate of tax to initial profits from projects; changes to film tax relief to make it more attractive and easier to use; and the charge to capital gains tax on non-residents owning UK property is to be consulted on early next year, for introduction in April 2015.
The bill also includes the expected increase in personal allowance to £10,000 for 2014/15, making a typical basic rate taxpayer £112 better off and taking 260,000 low earners out of income tax.
In all it is a “relatively benign set of changes”, according to Gary Heynes, tax partner at Baker Tilly.
Which he says are “welcome after a number of years of big changes predominantly affecting wealthy individuals and trustees.
“Perhaps this is a result of the chancellor acknowledging in his Autumn Statement speech that the wealthy already make a significant contribution to the total tax take.”
The full Draft Finance Bill can be found here.