UK drops tax crackdown on private equity and accountancies
UK drops tax crackdown on private equity and accountancies
The UK’s tax authority, HM Revenue & Customs (HMRC), has abandoned plans to alter the tax treatment of members within limited liability partnerships (LLPs), a structure prevalent among private equity firms and professional services. This decision, communicated earlier this month, comes in response to substantial industry lobbying and concerns over potential retrospective tax liabilities amounting to hundreds of millions of pounds.
In 2024, HMRC introduced unexpected modifications to the tax framework governing LLP members. These changes focused on “condition C” of the tax rules, which required LLP members to contribute capital equal to at least 25% of their profit share to maintain self-employed status.
Failure to meet this threshold could result in members being classified as employees, obligating firms to pay National Insurance contributions at a rate of 13.8%, set to rise to 15% from April. The revised guidance suggested that deliberately exceeding the capital contribution threshold might be considered tax avoidance, leading to investigations and potential backdated tax claims.
Industry Response and Lobbying Efforts
The abrupt nature of these changes prompted a strong response from industry bodies, including the British Private Equity & Venture Capital Association (BVCA) and the Chartered Institute of Taxation (CIOT).
Critics argued that the amendments were introduced without proper consultation and could have retroactive effects, creating significant uncertainty for firms that had previously relied on HMRC’s assurances regarding capital contributions.
Jitendra Patel, tax principal at accountancy firm BDO, noted that the changes “had felt like retrospective action” and caused considerable upheaval as businesses prepared to defend their positions.
After reviewing the feedback and engaging with industry representatives, HMRC decided to reverse the controversial changes. In an email to professional bodies, the tax authority stated that the amended guidance would “in effect, reverse the changes that were made in February 2024.”
An HMRC spokesperson further clarified, “Having conducted a thorough review and listened carefully to industry representatives, we’ve decided that the anti-avoidance rule does not apply where top-ups … .”
This clarification was welcomed by industry stakeholders, with Christopher Thorpe, technical officer at CIOT, expressing relief that HMRC’s revised interpretation would not equate legitimate commercial investments with abusive tax avoidance schemes.
The government’s decision to abandon the proposed tax crackdown provides significant relief to private equity and professional services firms. It ensures that genuine capital contributions by LLP members will not be subject to punitive tax measures, thereby preserving the self-employed status of partners and avoiding substantial retrospective tax liabilities.
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