Draft Social Security Contributions (Limited Liability Partnership) Regulations 2014
Draft Social Security (Contributions) (Amendment No. 5) Regulations 2014
The Committee consisted of the following Members:
† Barwell, Gavin (Lord Commissioner of Her Majesty's Treasury)
† Bray, Angie (Ealing Central and Acton) (Con)
† Burns, Conor (Bournemouth West) (Con)
† Dakin, Nic (Scunthorpe) (Lab)
† Esterson, Bill (Sefton Central) (Lab)
† Flello, Robert (Stoke-on-Trent South) (Lab)
Flynn, Paul (Newport West) (Lab)
† Garnier, Mark (Wyre Forest) (Con)
† Gauke, Mr David (Financial Secretary to the Treasury)
† Hart, Simon (Carmarthen West and South Pembrokeshire) (Con)
Jackson, Glenda (Hampstead and Kilburn) (Lab)
† Johnson, Gareth (Dartford) (Con)
† Mahmood, Shabana (Birmingham, Ladywood) (Lab)
† Russell, Sir Bob (Colchester) (LD)
Shannon, Jim (Strangford) (DUP)
† Simpson, Mr Keith (Broadland) (Con)
Stringer, Graham (Blackley and Broughton) (Lab)
Marek Kubala, Committee Clerk
† attended the Committee
Second Delegated Legislation Committee
Monday 24 November 2014
[Sandra Osborne in the Chair]
Draft Social Security Contributions (Limited Liability Partnership) Regulations 2014
4.30 pm
The Financial Secretary to the Treasury (Mr David Gauke): I beg to move,
That the Committee has considered the draft Social Security Contributions (Limited Liability Partnership) Regulations 2014.
The Chair: With this it will be convenient to consider the draft Social Security (Contributions) (Amendment No. 5) Regulations 2014.
Mr Gauke: It is a pleasure to serve under your chairmanship, Mrs Osborne, and to introduce the two sets of draft regulations. Both deal with national insurance contributions and arise from the changes made to the taxation and charging of national insurance consequent to changes to the treatment of partnerships in the Finance Act 2014 and the National Insurance Contributions Act 2014. It seemed sensible to debate them together. This is familiar territory for me and for the hon. Member for Birmingham, Ladywood.
The Joint Committee on Statutory Instruments has considered the draft regulations and did not raise any issues. I confirm that they are compatible with the European convention on human rights. The regulations, however, require the approval of the House. They apply from 6 April 2014 for the 2014-15 tax year and onwards.
On the draft Social Security (Contributions) (Amendment No. 5) Regulations 2014, section 13 of the National Insurance Contributions Act 2014 provided a power to make regulations to modify the way in which the liabilities of members in certain partnerships to class 4 national insurance contributions are determined. The section addressed an issue arising under existing partnership rules where the immediate entitlement to partnership profit is restricted by the alternative investment fund managers directive.
Under existing partnership rules, tax and NICs are charged on profits as they are earned, rather than when they are received. An unfunded NICs charge can therefore arise on profits that are allocated to an individual partner of an alternative investment fund management partnership and that are then deferred in line with the regulatory requirements of the AIFMD. That is because the partner cannot access the profits in the year in which they arise.
Following discussions with fund sector representatives and the Financial Conduct Authority, the Government put in place a statutory mechanism. The draft regulations remove the charge to class 4 NICs when the profits are allocated to an individual but access is restricted under
the AIFMD, and reinstate the charge when the profits are eventually vested in the individual. As a result, the individual will be liable to pay class 4 NICs only on having unfettered access to the profit. To ensure consistent treatment between NICs and tax, the regulations mirror tax legislation.On the draft Social Security Contributions (Limited Liability Partnership) Regulations 2014, section 14 of the National Insurance Contributions Act 2014 provides an express power to regulate to treat some members of an LLP who meet certain conditions as employed earners for NICs. Similar provisions treating such members as employees for income tax purposes can be found in the Finance Act 2014. Previously, all members of an LLP were treated for tax and NICs as self-employed but benefited from the tax and NICs rules for the self-employed, and the LLP did not have to pay employer’s NICs.
The treatment of members of LLPs as self-employed for tax and NICs was designed to replicate the position of traditional partnerships. Increasingly, however, LLPs have been used to disguise employment relationships and to avoid accounting for employment taxes and NICs. The new measures in the draft regulations and in the Finance Act 2014 ensure that the original intent—treating members of an LLP the same as traditional partnerships—is not used to create a tax and NICs advantage, but to create a level playing field for those who have not sought to misuse the rules for a tax and NICs advantage and those who have.
When certain conditions are met, a member of an LLP will be treated instead as an employee for the purposes of NICs. Broadly, that means they will have employee NICs deducted from payments to them, and the LLP will have to account for employer NICs and assume the other responsibilities arising from being the secondary contributor. The conditions were introduced by the Finance Act 2014. Broadly, the conditions are that the individual member of the LLP has little or no real economic interest or risk in the LLP, no significant influence over its affairs, and is largely rewarded by a fixed salary.
During the consultation in 2013 and 2014, Her Majesty’s Revenue and Customs became aware of proposals to create structures with corporate members to avoid the impact of the proposed changes. The proposals involved the individual establishing a personal service company or other intermediary, and that intermediary becoming a member of the LLP in place of the individual. They contain measures to counteract the artificial interposition of a company or other intermediary to avoid the impact of the legislation.
The regulations contain a degree of technical detail, so I will explain their contents. The regulations apply where the new tax provisions apply, and an individual member of an LLP—a salaried member—is treated for income tax purposes as an employee of the LLP under a contract of service. For the purposes of NICs, the salaried member is treated as an employee. Their income is treated as earnings for the purposes of NICs, and the benefits-in-kind regime applies to them.
As the salaried members are treated as employees for the purposes of employee NICs, the LLP is treated as an employer for NICs purposes and must account for employer NICs. The employer, as secondary contributor, is also responsible for statutory sick pay, statutory maternity pay, statutory paternity pay, and statutory
adoption pay. The regulations provide that the LLP will be responsible for the statutory payments in respect of salaried members.As I have mentioned, HMRC became aware of schemes to avoid the impact of the Government’s partnership proposals. The tax legislation to prevent such avoidance provides that, where an individual provides services to the LLP through an arrangement involving a member of the LLP who is not an individual—generally a personal service company—the individual providing the services is treated as a salaried member. An individual cannot therefore sidestep the impact of the measures by interposing a company or other intermediary between themselves and the LLP. The regulations ensure that, where the tax anti-avoidance measure is in play, the like NICs consequences will follow.
To avoid a double charge arising where the anti-avoidance measure applies, and where the intermediaries legislation, commonly known as IR35, also applies, the regulations in respect of IR35 are modified so that only one charge under the regulations can occur. To ensure consistent treatment for NICs and income tax, the regulations mirror the tax legislation, relying on mirroring definitions. The provisions are part of a package of tax and NICs measures that will yield £3.2 billion over the period to April 2019. The regulations contain minor provisions applying to Great Britain and to Northern Ireland and I commend them to the Committee.
4.38 pm
Shabana Mahmood (Birmingham, Ladywood) (Lab): It is a pleasure to serve under your chairmanship, Mrs Osborne.
As the Minister explained in his introduction, the instruments are on ground that is familiar to both of us. We discussed the taxation of partnerships, and limited liability partnerships in particular, in Committee under section 68 of the Finance Act 2014. The aim of the Social Security Contributions (Limited Liability Partnership) Regulations 2014 is to enable the treatment of salaried members of an LLP as employees for the purposes of national insurance contributions, as opposed to their previous status of self-employed.
LLPs set up under UK legislation are bodies corporate that combine the organisational flexibility of traditional partnerships with the benefit of limited liability for their members. When LLPs were introduced, the intention was that they would be treated as though they were traditional partnerships for tax purposes, instead of being subject to corporation tax, as would be normal for a body corporate. As a result, individual members are taxed on their share of the profits of the LLP in the same way that individual partners in a traditional partnership are taxed. However, as the Minister explained, it became apparent that the partnership structure was being used as a mechanism for tax avoidance, with some LLPs allowing certain individuals to become members who would be seen as employees if the LLP structure did not exist, thereby avoiding national insurance contributions charges. Therefore, the Government introduced changes in the Finance Act 2014. The measures follow on from that work.
As the Minister highlighted, we have discussed the material on a number of occasions. When we debated the measures in relation to income tax and the Government’s
changes to partnership rules, we had a long discussion about the process for bringing in the new rules. Those new rules unveiled in the Finance Act 2014 caused great concern because they were very different to what had been consulted on. Many stakeholders called for a deferral or a clearance provision, whereby partnerships could speak to HMRC, get their partnership structure cleared one way or the other and have it declared whether they were within the new rules.Given the amount of discussion that took place before the new rules became law, would the Minister update the Committee on how the changes are bedding in and what the experience of businesses has been? There was some discussion that businesses would have to undergo radical restructuring. What has been happening on the ground and have any other problems been reported? In Committee on the Finance Act 2014, we discussed the real-time information requirements for the reporting of payroll data. Will he update us on those matters? What is the latest estimate of the administrative burden on businesses as a result of the new changes, and will the instruments that we are debating have an impact on the initial assessment of that burden that was made in Committee?
The Minister and I have discussed a number of times the different treatment of individuals under tax law as opposed to employment law. We are concerned that we are getting to a position where the differentiation in treatment under employment law and tax law will create greater uncertainty, complexity and unfairness, whereby people are taxed as if they are employees but are without the concurrent employment rights. Is HMRC worried that that is happening in relation to salaried members of LLPs? It would be helpful to know if discussions on employment rights have been had with Ministers in other Departments, especially in the Department for Business, Innovation and Skills.
During our discussions on the Finance Act 2014, the Minister said that the measures apply to UK LLPs only because entities outside the UK that are broadly equivalent to a UK LLP do not benefit from the automatic presumption of self-employment. He said in Committee that the Government would continue to monitor developments in relation to LLPs outside the UK. Has he found any evidence that entities outside the UK are being used to disguise employment?
The second regulations make provision to deal with the unfunded NICs charge that can arise when profits of an individual partner in an alternative investment fund manager partnership—an AIFM firm—are deferred in line with new regulatory requirements. The tax and information note states:
“There may be some operational impact for HMRC for establishing a process for allowing alternative investment fund partnerships to use the proposed mechanism. HMRC is establishing the costing for this process.”
Would the Minister update us on that?
Finally, the Minister spoke about HMRC shutting down further avoidance attempts as a result of the new partnerships legislation. Will he update us about whether HMRC is investigating other ways in which people are already trying to get around the new legislation as of April 2014? Are any further changes envisaged?
4.45 pm
Mr Gauke: I thank the hon. Lady for her scrutiny of the measures. As I have said, this is familiar territory for both of us, given that we debated the Finance Act 2014 in the summer. The recent National Insurance Contributions Act 2014 also touched on some such matters.
I will attempt to address some of the hon. Lady’s questions. On the limited liability partnerships draft regulations, her first set of questions may be characterised as follows: “We have debated this matter before. What’s the reality? How’s this working out in practice? In particular, what’s the impact on LLPs?” Before Royal Assent, a number of partnerships sought clarification of the rules as they applied to their LLP. Since Royal Assent, a dedicated customer relationship manager team has dealt with such queries. There are no centralised statistics as yet, but the relevant HMRC teams are working through the clearance process with LLPs.
As far as the original estimate of the administrative burden is concerned, the rules have been in place only since April 2014, so it is still too early to make a re-estimate of the costs involved. We continue to stand behind the numbers provided at the time that the revisions were introduced, which were in the tax information and impact note, but as and when more evidence comes to light, we will look to update it.
On the difference between tax and employment law, I can probably say that the Office of Tax Simplification and, separately, the Department for Business, Innovation and Skills, are reviewing employment status issues. That is all I can say for now.
The hon. Lady mentioned the application of the LLP rules to non-UK LLPs. She is right that we will keep that under review. The draft regulations still apply only
to UK LLPs. We will continue to look out for any evidence emerging of LLPs being used by entities outside the UK but, as such, there is nothing more I can say to update her. We will continue to scrutinise the situation, but that is where we are.On the draft social security regulations, the hon. Lady asked whether HMRC was investigating other ways of getting around the legislation. I believe she meant that more widely and, in respect of both sets of draft regulations, we are not aware of any such things at the moment. Given that HMRC customer managers will continue to scrutinise such matters, and given the close relationship with LLPs, we will be able to identify such activity.
The hon. Lady also asked about any practical problems in the context of the draft social security regulations with providing information—real-time information and so on. HMRC has not been aware of any significant issues with RTI in that context.
I hope those points of clarification are helpful to the Committee and that the draft regulations will be supported.
Draft Social Security (Contributions) (Amendment No. 5) Regulations 2014
That the Committee has considered the draft Social Security (Contributions) (Amendment No. 5) Regulations 2014.— (Mr Gauke.)