He’s saying that using a partnership saves you NIC compared to the corporate form.
And who do you know who operates through a partnership? Why, Mr Richard J Murphy, of course!
Why does he view his use of a partnership to be tax compliant, when other businesses that receive an apparent tax advantage from their business structure are criticised as tax avoiders?
I spotted that. It’s very odd: yes, Class 4 NI is an advantage compared to paying Class 1 (especally secondary) but it’s a great disadvantage compared to not paying it at all on dividends.
So the LLP model is only an NI saver if you compare it to a company with one or two owner-directors who take all the profits as salary, and little or nothing as dividends.
HMRC are on record as saying that incorporating your business and thereby saving NI is perfectly acceptable (see the GAAR guidance, which Murphy signed off on, for example). So the NI saving of an LLP only exists by comparison with NI which you don’t need to pay, and which HMRC are happy for you not to. It’s a bit of a straw man.
I did note that, in response to the question “What are the advantages of a partnership rater than a company?”, he offered a host of mainly tax advantages under the heading “flexibility”. Hmm.
My beef with him is partly the lack of genuine expertise, partly the abusive/defensive behaviour he uses to cover this, and partly the naked double standards he employs depending on whether his subject is friend or foe (or possible source of work).
I am still concerned that the LHTD’s own income might be described as non-chargeable and not subject to a VAT charge (Please note Pellinor, he is saying it is outside the scope of VAT; not that it is under the VAT threshold).
It’s an awkward distinction in VAT law, that no-one’s really cleared up well – if he’s getting paid but not for providing services to the payer, is he making taxable supplies? I can see different arguments depending on the exact facts, and outside the scope could well be correct.
The direct tax analysis is different, of course: VAT is tax on the customer, and income tax on the supplier. He could easily be subject to income tax but not VAT.
“My beef with him is partly the lack of genuine expertise, partly the abusive/defensive behaviour he uses to cover this, and partly the naked double standards he employs depending on whether his subject is friend or foe (or possible source of work).”
Ditto on that.
“It’s a bit of a straw man”
Don’t disagree, Pellinor. But whether or not it does give a tax advantage is irrelevant. All that matters is that he believes it does. And he took a course of action that he believes leads to a lower tax bill than another available action.
When he analyses other companies’ affairs, the tax bill is all that matters in determining innocence or guilt. The mere fact that a business paid less tax than it could have done is considered proof that it behaved because of that tax advantage. So what other explanation could there be, using his own logic, for setting up Tax Research LLP if not the belief that it would give him a tax advantage?
I think he may well have set up Tax Research LLP to get the benefit of limited liability without using a company.
I’m not sure why he’d not want to use a limited company, but then either company or LLP does the main job. From a tax point of view an LLP is perhaps a bit cleaner if you don’t want to run the risk of IR35, or having to do a payroll; or perhaps he didn’t want the risk of people saying he only did it to get the 20% CT rate. But there’s not a lot in it.
It may be as simple as the fact that partnerships are traditionally more common than companies for accountants, so an LLP is an obvious structure for an accountant.
“. All that matters is that he believes it does.”
But he doesn’t believe that. His weird plan thing says an advantage of a partnership vs company is that it saves NICs, “but not if directors paid mostly by dividend.” (Quoting from memory.) So yes, he may well be an idiot/hack/whatever, but he’s fully aware that a company can bypass NI by paying dividends.
If runs a partnership, I suspect it’s to avoid having to file anything publicly. But why does anyone care what he thinks?
I agree with you that there is an inconsistency in that, as you say, he expects other people to choose high-tax structures but he hasn’t deliberately set out to increase his own NI bill.
I do note that his tax and NI would be exactly the same through the LLP as if it would be if he received the income personally: so I can’t accuse him of saving tax, and “not wilfully paying an extra amount” is not objectionable to me whoever we’re talking about.
I didn’t bother watching his actual evidence – looking at his mind map there didn’t appear to be anything about the draft legislation.
I had another look at it and noticed that the campaigner for transparency missed the most obvious advantage of a general partnership (not an LLP or Limited Partnership). One of the biggest advantages is not having to file publicly available accounts.
I thought that would’ve topped his list.
Luke, he’s a member of Tax Research LLP and LLPs do file their accounts. General partnerships don’t.
Pellinor, didn’t you once discuss with him how much work his wife does for him? Shouldn’t she be getting a bit more than the notional 1% she is given in the accounts?
But, then again, she is a doctor and probably a higher rate taxpayer. It’d probably not be very tax efficient….
😉
Ben: yes, we did have a brief discussion on that. He said she makes a significant contribution to the work of the LLP, so it is entirely appropriate to have her as a partner and he rejected any suggestion that she is included simply because an LLP requires two members and he wanted to get limited liability status.
He didn’t comment on the relationship between “significant contribution” and “1% profit share” though.
Doesn’t he also use several different vehicles, not just the LLP, which means that each one keeps below the VAT threshold? Or perhaps he doesn’t any more; I’ve not checked recently.
From memory his wife did have a larger share in a former partnership (can’t remember what form) while she was on maternity leave and presumably not a higher rate taxpayer. Think it was discussed here a while ago.
Pellinor. 1% is pretty tight, don’t you think? “Significant contribution” sounds more like, what, 20% of profits perhaps?
Ben: I don’t have enough data to judge.
HMRC normally regard 20% or so as significant in most contexts; but the Murphys are responsible for their own self-assessment and know the facts better than we do. The 1% being significant is slightly surprising, certainly, but there could be any number of reasonable explanations.
‘I think he may well have set up Tax Research LLP to get the benefit of limited liability without using a company.’
But why would he need his liability to be limited, given that he is omniscient?
Pellinor: too true, I’m quite happy for HMRC to worry about that instead of me.
It’s difficult to think of a commercial situation, not driven by tax or regulation, where you would have a 1% – 99% ownership structure. You’d either expect a lot more than 1% or a salary.
Lots of people having small shareholdings, yes of course, but one person with 99% and the other with 1% looks odd.
Surely in an arm’s-length situation it isn’t generally going to be worth the hassle of having another shareholder just to reward someone who is only worth 1%.
Unless of course it’s your wife and you trust her not to actually exercise her shareholder rights, in which case it looks like something of a sham.
An LLP needs to have two members to exist, so that explains the existence of the wife. However, I don’t believe there’s a need for the wife to take a profit share, and at 1% it is not material to be accused of rampant tax avoidance. Ill dig at Ritchie any chance I get but in this case he may be being intentionally whiter than white.
However one interesting snark is that an LLP doesn’t account for tax as that is the liability of the members. In terms of transparent reporting of tax liabilities, its as opaque a corporate business model as you can get. Which must be a tricky dilemma when you’re considering country by country reporting.
Murphy used to have a company but has would it up while the undistributed profits could be taken as a tax-free capital gain shortly before that loophole (which he vehemently criticised when others used it) was closed.
One advantage of the LLP is that partners may draw from it some of the profits that they expect from future distributions so that while the top tax rate was 50% Murphy was able to spend money that he had “earned” but only pay 45% tax on it – a couple of years later.
Isn’t one advantage of an LLP is that it is tax transparent. That is there is no tax at entity level, and that for tax purposes you look through the entity and tax the partners personally. That means there is no corporation tax payable.
That means that they can take advantage of personal allowances, whilst if he used a company then he would have to pay tax on any profits that the company made.
I could be wrong, not a UK tax expert, but one of the advantages of LLPs is that they are tax transparent.
the real Murphy richard nails the subject:
http://justicefortaxesnetwork.wordpress.com/2014/01/26/restoring-the-50-rate-on-dividends-is-essential-but-dont-mention-richard-murphy/comment-page-1/#comment-1936
Offshore Observer said:
“Isn’t one advantage of an LLP is that it is tax transparent. That is there is no tax at entity level, and that for tax purposes you look through the entity and tax the partners personally.”
Which means that his LLP doesn’t pay any tax at all. Rampant tax avoidance!
Nonsense of course, since the partners pay tax personally on the profits, but no more ridiculous than a lot of the things Murphy complains about.
john77 – you misunderstand: with an LLP, because it’s transparent, income is taxed on the members as soon as it arises. It is not possible to defer the taxation so you can choose between rates (other than perhaps by playing around with when you recognise income and costs for accounting purposes).
To do that you need a company, which is why the draft Finance Bill has the various provisions attacking structures where companies are included in partnerships as these can be (or in HMRC’s view, are only) used to defer tax.
Offshore Observer – you’re right, but the disadvantage of an LLP is that you have to pay full income tax on all the profits. So if you earn say £100k, if it’s through an LLP then you have your personal allowance but income tax at 20% and 40%, plus Class 4 NI. At 2012/13 rates that’s about £30k of tax and another 4k or so of NI.
If a company earns £100k then it pays £20k in corporation tax. You can’t then use the remaining £80k personally, though: to get it out as a dividend would cost about £11k in income tax. The tax position is therefore roughly the same, but you save the NI by using a company, and can pick and choose when the excess income tax arises (and therefore the applicable rate).
The optimum would be to pay a salary of about £7,500 and take the rest in dividends. This means you get your NI stamp, and personally pay much the same in tax, but the company gets a deduction for your salary so paying you £7,500 only reduces the dividend by £6,000. You end up about £1,300 better off in cash terms compared to an all-dividend route, and about £5k better off compared to an LLP.
@ Pellinor
Income cannot be taxed as soon as it arises (except under PAYE) because only the profits of the LLP are taxable and these are assessed after the end of the accounting/tax year.
Murphy spends money that he has borrowed from the LLP, which is a distinct entity. It does not become *his* money until profits for the year are calculated and distributed after the end of the year.
john77 – but the tax is dependent on those profits and you cannot choose to defer it. If the top rate in the year you make the profits is 50%, you pay that rate even if you leave the money in the LLP’s bank account until the rate falls to 45%.
The consequence of making a £100k profit in an LLP in 2012/13 is that you have a liability for £30k tax and £4k NI in respect of 2012/13, even if you take no cash out of the LLP.
By contrast, the consequence of making £100k profit in a company in 2012/13 is that you pay £20k tax in 2012/13 and then (if all you are concerned about is tax) you can choose when to pay the remainder by timing your cash dividends carefully.
The tax rate on “the remainder” will depend on the rates in force when the dividend is paid regardless of those in place when the profits were earnt. They may be nil, if you’re a basic rate taxpayer when you take the profits; or you might dissolve the company and claim Entrepreneur’s Relief to get 10% tax.
A company shareholder can choose to take advantage of the 42.5% rate dropping to 37.5%, if he wants to, though an LLP member cannot take advantage of the 50% rate dropping to 45%.
@ Pellinor
There are lots of ways where you can time payments of income and expenses to move net income declared for tax into a year when the tax rate is lower, and Murphy was an adviser on taxation before he became a bloggers for the unions. It is actually quite hard work to make honest tax returns under the new rules imposed by Brown to ensure that self-employed persons other than lawyers did not take advantage of a loophole that was being so exploited by lawyers that it was making press headlines and it is much easier to cheat if you are playing with accruals instead of cash receipts.
Murphy’s accounts show receipts in 2011-2 on which he does not pay tax until after the end of 2012-3 of £24,137 compared to £13,300 in 2010-1 and £5625 in 2009-10 on which he did not pay tax until after the end of 2010-11. During 2010-1 when top rate tax was 50% he drew cash from the LLP in excess of declared profits so that its net assets went from +£3628 to -£5247. Effectively that means £8875 of cash into his pocket in excess of the income he declared for tax and £7675 of cash receipts into the LLP in excess of the income it declared for tax in that year when top rate tax was 50%.
The possibility of shifting income around in the accounts so it falls in a different year is common to all forms of business – company, sole trader, LLP, whatever.
It’s not an advantage of an LLP: a company can do anything an LLP can do in that regard, plus it can time dividend and salary payments to get a tax advantage.
@ Pellinor
Murphy had a company as well when small companies had a special tax break.
@ Pellinor
Murphy had a company as well when small companies had a special tax break from his pal Gordon Brown.
That wasn’t a tax break, that was a loophole which was unscrupulously exploited by tax avoiders!
We know this, as that’s how Gordon Brown described it two years after he introduced it… 🙂
So Murphy is a tax avoider ….