Stay informed with free updates
Simply sign up at UK Myft Digest – delivered directly to your box.
The UK tax authority has changed a blow that private capital and professional services feared would result in hundreds of millions of pounds of retrospective tax liabilities.
HMRC made unexpected changes last year in tax treatment of members of limited liability partnerships – a structure used by many private capital, accounting, legal and other professional services firms – the opening of investigations and the search for backward taxes.
After lobbying the industry and while the United Kingdom Government seeks to restore business relations after a budget reaction in the fall, HMRC contacted several professional organs earlier this month, confirming that it aimed to return the course.
“The amended guidance, in fact, will return the changes that were made in February 2024,” HMRC said in the email, which was seen by the Financial Times.
The change was welcomed by the British Capital and Venture Capital Association and Chartered Tax Institute.
The line had to do with changes to the rules presented in 2014, which set out the criteria to judge whether members of limited liability partnerships were self -employed or employees. Prior to 2014, LLP members, commonly known as “partners”, were generally accepted as self -employed.
According to the rules, if an individual is considered to be employed, their employer must pay national insurance contributions of 13.8 percent of the salary of employees, due to a 15 percent increase from April.
Part of the tax rules – “Condition C” – is about how much a member a member contributes to the limited partnership. If it is less than 25 percent of their profit portion, they are considered an employee. This means that partnerships have tried to ensure that capital contributions exceed the threshold of 25 percent.
However, last year HMRC changed its guidance to say that failure of the purpose of the situation by making excessive capital contributions may make mistakes of tax avoidance rules.
BVCA lobbied the government, complaining that the change was introduced without consultation and was potentially retrospective.
Jitendra Patel, the tax director at the BDO Accounting Firm said last year’s change “felt as retrospective action” because tax rules had been in place for 10 years. At that time, HMRC had previously assured the firms that they could meet the rule of C state by ensuring that capital contributions were on the threshold, he said.
It was “welcome” that the tax authority had changed the course, he said, but in the meantime the affected businesses had experienced “many unrest” and spent time and money preparing to protect their position.
HMRC said: “By making a complete summary and we have listened carefully to industry representatives, we have decided that the anti-avoidance rule does not apply when the top-up is true, destined to stay and create true danger.”
Christopher Thorpe, a technical official in Ciot, said: “We are pleased that HMRC has agreed to change their interpretation of condition C, as their previous interpretation could have equated completely innocent and trade investments with abusive acts.”
