Is this a tax crackdown that Ritchie will support?

There have also been suggestions that thousands of UK professionals, including lawyers, surveyors and estate agents, face a tax hit over a plan to clamp down on National Insurance exemptions for partnerships.

Treasury officials are said to believe that some firms are “disguising” employees as partners to avoid employer’s National Insurance contributions.

It is thought that partners could be stripped of their self-employed status unless they can prove they have put their own capital at risk in the business – a move that could affect many smaller law and accountancy firms as well as estate agents and surveyors.

Bill Dodwell, head of tax policy at Deloitte, said: “If they don’t deal with this properly then I do think it’s fairly damaging for the smaller part of Britain’s professional partnerships, which covers sectors like high-street accountancy firms or estate agents. They will potentially be asked for more tax.”

He added: “There is clear evidence that there is a gap here that has been exploited, and so I can understand why it’s right to shut that down. I just hope there isn’t collateral damage.”

An increase in the taxation of high street accountants……

23 thoughts on “Is this a tax crackdown that Ritchie will support?”

  1. It will at best be ignored.

    The irony being, of course, that this is 100%, 24 carat, proper tax avoidance.

  2. Not being a lawyer but being related to several, I do seem to remember some conversations about the difference between “partner” as a title (possibly with ‘junior’ in front) and “capital partner” as an employment status.

    Although there is probably something in the acres of legislation making it illegal to call an employee of a partnership, ‘partner’, even if you aren’t fiddling the tax status.

  3. SE, loads of firms do it. It’s just grade inflation designed to appease frustrated employees. It always amazes me just how easily bought off such people are.

  4. What’s the thinking behind exempting some people from making National Insurance contributions? The difference between a partner with capital at risk and one without is simply that the latter is (presumably) poorer; so this comes across as a tax break for the wealthy. At any rate it seems a rather arbitrary distinction.

  5. Beancounters at treasury put knife into beancounters in high street..
    Truly, there is no honor amongst theives.

  6. What’s the thinking behind exempting some people from making National Insurance contributions?

    They’re not. They need to make their own NI contributions under Class 2 and, almost certainly Class 4. But they do it, not the business (although, I think, you save on employer’s NI. Because, legally, they are the employer.)

  7. How about abolishing the thinly disguised surtax called National Insurance and call it for what it is.

    The tax incidence of Employer NI falls wholly upon the employee. The real effective marginal tax rates in the UK on the low paid are some of the highest in Europe as a consequence.

    The ‘standard’ marginal rate is close to 45% (20% income tax + nearly 25% NI)

    The marginal income tax rate between £100 and £115k is over 75% due to 62.5% act of bastardy to steal back the tax free allowance + nearly 14% Employer NI.

    This is higher than the Netherlands where the equivalent effective tax plus social insurance rates are 33.5%, 42%, 42%, and 52%, and mortgage interest is still tax deductible.

    Anyone who tells you that the UK is low taxed country is lying through deliberate omission.

  8. So any firms that aren’t already limited companies will now incorporate, dishing out alphabet shares to senior employees. An increase in incorporations is then sold as more ‘new businesses’ being created and the government pat themselves on the back, just as Labour did when the lower rate of corp tax led to a mass of incorporations of existing businesses.

  9. “Is this a tax crackdown that Ritchie will support?”

    Well…it might be. But then again, being the Courageous senior partner with Tax Research UK, he might be more interested in another little wheeze that’s out there.

    It one where a business’ income is called Not Income At All, but instead is a grant, an honourarium if you will. As such it does not come in return for any services rendered, Noooo Sir. And because there isn’t the provision of goods or services – absolutely there is not! – it doesn’t attract VAT. So no need to consider whether it is standard or zero-rated etc.

    Now it strikes me that, if what is really happening is you are receiving it simply you are doing something (let’s say, oh I don’t know, writing a blog for example) and the expectation is you will keep doing it and the payer – grantor – is paying you the grant in that explict expectation, well that looks like avoidance (evasion?) to me.

    Yes, I would expect a fearless, Courageous if you will, tax researcher to be hunting this down.

  10. I couldn’t believe it that when i moved to China and my accountant asked if i wanted to carry on making NI contributions. I was going to tell her to fuck off until she said it would now be 12 quid or something a month! My earnings doubled and my NI became a tiny fraction of before. its fucked up… like most ponzi schemes are i guess.

  11. This is a pretty complicated area. In most traditional law firms (those not operating through an LLP) there are equity partners and salaried partners. The difference will be that the equity partners get a share in the profits of the business while the salaried partners get a salary (the clues in the name I guess). That will all be set out in the partnership agreement.

    It is usual that people progress from salaried partner to equity partner after a period of time. They do not need to contribute capital as in most cases the capital is effectively time served generating profits for the equity partners.

    In law however each partners is jointly and severally liable for the debts of the entire firm. The status of salaried or equity partner is meaningless. Once you are a partner you are part of the management of the firm, are in business in common with the other partners and everything you own is one the line should the firm go bust. There is no limitation of liability in a traditional partnership, LLPs are different.

    So this becomes a bit complicated. If the firm is calling someone a partner for NI purposes but that person is not actually a partner then yes that is pretty straight up tax evasion. But if they are are a partner in the agreement and able to bind the firm by thier actions and the other partners are liable for thier debts it seem pretty straightforward to me that they are a legitimate partner.

    If it were me I would be pretty careful about who I let into the partnership given that I would become responsible for their actions If I were to make someone a partner just to avoid NI contributions then that is a pretty big risk to me personally. I suspect that most firms run by competent people would be pretty unwilling to give someone the title of partner unless they were competent and I was happy to have them put all my own assets at risk.

    It has also just occurred to me that if all my personal assets are at risk because I am a partner it is pretty difficult to say that I haven’t contributed to the capital of the firm, even if I haven’t actually paid anything to that capital, my house, car, life savings etc are effectively avaliable to creditors if the whole thing goes pop.

    As I said for those firms practising as LLPs slightly different considerations apply. But partners of LLPs can still bind the firm and are personally liable for thier own actions so it may not be that different.

    But back to Tim’s point, this all seems a bit pointless really, lets crack down on a few law firms and accountants, yeah that will close the deficit.

  12. Ah, but Murphy’s capital (or, at least a tiny bit of it) *is* at risk so this this will not make one iota of difference to his NI-avoidance by collecting all his income as partenership profits instead of self-employment income.

  13. John77 – partnership profits are taxed in essentially the same way as self-employment income: there’s no avoidance there.

    I’m not sure why he needs an LLP at all, given that he is effectively a sole trader. I assume that he wants the cachet of a formal trading name, rather than just being cited as “Richard Murphy” everywhere. It’s the sort of thing that in another person he might label abuse, in that limited liability is achieved in a slightly artificial way (a 99%:1% partnership split seems a little uncommercial), but it is perfectly legal.

  14. Let’s be real here, he undoubtedly is an equity partner. So it isn’t aimed at him. However, reading his immediate reaction to the budget announcement, we he thought it was him, was hilarious. The short answer to Tim’s question is: no, this is the one tax crackdown I have ever read him oppose. Fancy that!

  15. Yes it must be outrageous tax avoidance that members of an LLP are treated as self-employed. What cunning devious sly twisting of tax law have these people been up to?

    Oh wait, it’s the general provisions of the Limited Liability Partnership Act 2000 and the specific provisions of S863 Income Tax (Trading and other income) Act 2005 which deem members of a LLP to be carrying on the business of the LLP as individuals. So it’s the law.

    No avoidance, no evasion. The law exactly as it is written.

    So the law says “set up your business in this way and the tax consequences will be this. Set it up in that way and the tax consequences will be that”. In much the same way as the law says “invest in an ordinary bank account and we will tax the interest, invest in a pension scheme and we won’t tax any interest”.

    And people have a hissy-fit and scream avoidance and evasion about one of the above and not the other?

  16. Andrew – that’s HMRC’s interpretation, but I think it’s a bit narrow. S863 says that the activities of an LLP shoud be treated as if carried on by its members in partnership, and HMRC have interpreted that to mean that they must therefore be self-employed. But partnership tax allows for partners to be treated as employees in some situations – unfortunately, HMRC don’t apply that further rule to LLPs. If they did, then there’d be no avoidance problem here to be tackled.

    We would have a problem around who exactly is employed and who isn’t, but we have a lot of well-known tests in this area and it shouldn’t be any harder to get to a sensible conclusion than it is with companies.

  17. I’ve always assumed that RM does his writing via a LLP to cover his arse if he ‘accidentally’ libels someone with deep pockets who takes him to the cleaners in court. There doesn’t seem to be any obvious tax advantages, as the other partner apparently has significant income other their own, and income shifting can’t take place.

  18. Salaried Partners (which is what I’ve always seen these people referred to as) in an LLP are effectively employees (relatively senior ones, but still) for everything but tax purposes.

    Changing the NI rules to treat them as employees would make sense.

    It’s not small firms that this change affects; only big ones, big enough to have more than one level of partner.

    Tax avoidance for me is doing things that are in compliance with the rules, but which clearly show that the rules are f**king stupid.

  19. “Tax avoidance for me is doing things that are in compliance with the rules, but which clearly show that the rules are f**king stupid.”

    A fair point but remember that there are lots of fucking stupid rules that mean people paying MORE tax than might be thought just. Try asking HMRC to work on ‘principles’ when the rules work AGAINST a client and see how far it gets you. It seems those paying taxes are expected to put up with every rule that works against them but get pilloried if they use a rule that works for them.

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