ABSTRACT
The Finance Bill Sub-Committee (FBSC) of the Economic
Affairs Committee has met each year since 2003, except in 2010
and 2012, to examine selected aspects of the year's Finance Bill.
In December 2010, the Government introduced a "new
approach" to tax policy-making which includes publishing
a draft Finance Bill in December. This means that the Sub-Committee
can now start its work earlier in the year and examine the draft
Finance Bill. The FBSC began its inquiry into draft Finance Bill
2014 in January and chose to look at the measures which deal with
the taxation of partnerships and at the extent to which they had
been developed according to the principles of the new approach.
It also considered how effectively the new process had been applied
to the development of tax legislation since 2011 and whether the
recommendations of our 2011 inquiry into the new approach had
been acted upon.
The measures affecting partnerships
The Limited Liability Partnerships (LLP) Act 2000
introduced into UK law a new form of partnership in which each
partner's liability for the partnership's debts is limited to
his or her contribution to its capital. A feature of LLPs is that
for tax purposes all members of a LLP are treated as partners,
and so as self-employed, even if they would have been treated
as employees in a traditional or general partnership. This provision
appears to have been abused to minimise the income tax and NIC
liabilities of LLP members and the NIC and employment law obligations
of LLPs.
One of the measures in the draft Finance Bill seeks
to counter this abuse by introducing legislative tests intended
to place members of a LLP in the same tax position as partners
in a general partnership. A LLP member would pay income tax and
NICs as an employee if he failed these tests and the LLP would
pay employer NICs.
Most of the evidence we received argued that the
proposed legislative tests went too wide and would have the effect
of classifying as employees some LLP members who would be treated
as partners according to case law. Most of the evidence was in
favour of using the case law test to determine whether a member
of a LLP was a true partner or an employee, in the same way as
for a general partnership.
Although we think it is still open to question which
approach best achieves the Government's objectives, we agree that
the measures in the draft Finance Bill are so different from the
original proposals consulted on in the summer that more time is
needed to settle that question and get the legislation right.
We therefore recommend delaying the salaried members' provisions
until April 2015. This would also enable businesses to adapt to
any changes and the Government to consider whether the new rules
should apply for the partnership's accounting year rather than
for the tax year. We set out the likely Exchequer effects of such
a delay.
The main other measure concerns those partnerships,
including LLPs, with corporate members ('mixed membership partnerships').
It seeks to counter the practice of allocating disproportionate
profit shares to corporate members, with the effect that the total
amount of tax borne by the partnership's members is reduced or
deferred. The measure gives HMRC the power, in certain circumstances,
to reallocate profits on a 'just and reasonable' basis. Following
consultation, special arrangements are being introduced for alternative
investment fund managers who are obliged to defer bonuses to meet
the requirements of an EU directive. The consultation also drew
attention to the scale on which profit shifting was practised
in the AIFM sector, causing estimates of yield from this measure
to be revised very sharply upwards.
Most of our witnesses were concerned that, in attempting
to counter the exploitation of structural differences in the tax
system, as well as outright avoidance, the measures risked affecting
long-established commercial practices, including the use of corporate
members to reduce the tax liability on profits intended for reinvestment
in the business. It is clear however that the Government intend
the legislation to apply to such cases. We recommend that HMRC
amend the provisions so that they are drafted more precisely and
rely less on guidance.
We were concerned that HMRC appeared to have allowed
the practice of profit shifting to become embedded as 'acceptable
tax planning'. And we were also concerned at HMRC's unwillingness
to explain and disaggregate their estimates of yield from the
partnership measures.
The new approach to tax policy-making
We looked at the extent to which the development
of the partnerships tax package was consistent with the new approach.
We commend the Government on the conduct of the consultation between
May and August 2013, but criticise its decision to launch significantly
different proposals in the draft Finance Bill 2014 without allowing
time for further consultation.
We also looked at the development of tax legislation
since 2011 and conclude that, in the great majority of cases,
the new approach to tax policy-making had been applied comprehensively.
We commend the Government accordingly and recommend that it consider
any lessons learned about best practice and take steps to apply
them to achieve consistently good results.
We were pleased to hear that the tax policy partnership
between HMRC and HMT appeared to be working more effectively.
We were disappointed that a formal review of their partnership
had not been carried out and that recommendations in our Report
of 2013 had not been followed up. We reaffirm the substance of
our recommendations about the policy partnership between HMRC
and HMT, and about consultation on impact assessments and with
smaller businesses and non-business stakeholders, post-implementation
reviews and 'roadmaps' outlining the strategic context in which
tax policy changes are being developed.
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