Chapter 7: Summary Of Conclusions And
Recommendations
The Consultation and the Draft Legislation
260. The failure of the Limited Liability Partnerships
Act 2000 to achieve its policy objective of aligning the tax treatment
of LLP members with that of partners in a general partnership
is at the heart of the problems that have arisen with LLP members
all being treated as self-employed. (paragraph 59)
261. We accept the evidence of our private sector
witnesses on the provisions concerning salaried members of LLPs,
and agree that the December proposals are significantly different
from those proposed in the earlier consultation. (paragraph 60)
262. This change of direction in December has
implications for the way in which this consultation should have
been handled and the way in which consultations generally should
be handled. We return to this in Chapter 6. (paragraph 61)
Salaried Members of Limited Liability Partnerships
263. It is clear that there are alternative ways
of achieving the policy outcome of aligning the tax treatment
of LLP members with partners in a general partnership. One approach
would be to remove the presumption of self-employment from the
tax legislation and to rely on partnership case law to determine
whether a LLP member is an employee or a self-employed partner.
Another approach would be to adopt legislative tests designed
to achieve the same outcome. (paragraph 92)
264. In our view, it is still open to question
which is the better approach. We agree strongly with those who
stressed that, if legislative tests are adopted, it is vital that
they achieve the intended policy outcome of aligning the tax treatment
of members of LLPs with that of partners in a general partnership.
(paragraph 93)
265. If our recommendation on commencement of
the provisions on salaried LLP members (paragraph 273 below) is
accepted, it will provide time to enable a reassessment of both
approaches and for HMT and HMRC to have further discussions with
all interested parties. (paragraph 94)
266. Nearly all the evidence that we received
supported the view that the proposed legislative tests to determine
who is a partner for tax purposes do not achieve their policy
objective. If the Government continues with the approach in the
draft legislation, it is vital that they address all the points
made and amend those tests so that they place members of LLPs
in the same position as partners in a general partnership. (paragraph
122)
267. The Government should also consider the
position of non-UK LLPs carrying on a business in the UK with
a view to aligning their treatment with that of UK LLPs. (paragraph
123)
268. We expect that many points on the detailed
drafting of the legislative tests will have been made to HMRC.
It is essential that the drafting of the legislation is tightened
so that, as far as possible, any subjectivity and resulting uncertainty
is minimised. We recommend that this be done in close consultation
with all interested parties so that, where possible, consensus
is reached. (paragraph 129)
269. We recommend that the guidance should
then be redrafted so that it performs its proper function of clarifying
rather than extending the primary legislation. (paragraph 130)
270. We recommend that the Government
consider with interested parties the case for changing the basis
of the tests decided on so that they operate by reference to the
accounting period of the partnership rather than over a fiscal
year. This would avoid some administrative difficulties that would
otherwise arise. (paragraph 131)
271. Given the change of approach to the provisions
that took place in December, we conclude that there is too little
time to settle all the outstanding issues, get the legislation
right and enable businesses to adapt to that legislation in time
for a 6 April start. (paragraph 136)
272. We recognise the importance to the Government
of the tax yield from these measures. However, taking the time
necessary to target these provisions more precisely would ensure
that the resulting legislation was more robust and effective and
that the new rules gained greater acceptability amongst taxpayers.
(paragraph 141)
273. Accordingly, we recommend that the
Government give urgent consideration to delaying these provisions
until next year. That would give time for a reassessment of the
alternative approaches to achieving the policy outcome and, if
the present approach in the legislation prevailed, to target that
legislation more accurately. (paragraph 142)
274. A delay would also give time to make a proper
assessment of whether these provisions should apply for the accounting
periods of partnerships rather than for the fiscal year in order
to reduce the administrative burden on partnerships affected.
(paragraph 143)
The Other Elements of the Partnerships Package
275. We acknowledge that it is open to the Government
to make structural changes of the kind proposed for mixed partnerships
to prevent or reduce tax loss, although it should state its objectives
clearly at the outset. (paragraph 169)
276. We are concerned, however, at the apparent
disconnect that can develop between business and HMRC over what
is acceptable for tax purposes. Had HMRC been aware of the scale
of the practice of profit shifting earlier and dealt with it then,
there might have been less resistance to the proposed changes.
We are also concerned by the loss of tax that can arise if potentially
unacceptable practices are not addressed as early as possible.
(paragraph 170)
277. We are sure that all the points that have
been made to us on the drafting of the legislation will have been
made directly to HMRC. We strongly recommend that HMT and
HMRC consider them all very carefully with a view to tightening
the legislation so that it is drafted as precisely as possible
and the reliance on guidance is reduced. (paragraph 171)
278. If this can achieved in the time available,
we see no reason why the mixed membership proposals should not
go ahead with effect from 6 April, thus retaining most of the
yield from the partnership package. (paragraph 172)
279. We fail to understand why HMRC has been
so unwilling to provide more detail on how it has arrived at the
figures for the additional yield of £1.92 billion scored
in the 2013 Autumn Statement. Of course, we wholly accept that
HMRC is prevented from doing so if that would identify individual
taxpayers, or even smaller groups of taxpayers. But we think that
is unlikely to be the issue here. (paragraph 183)
280. We recommend that, within the normal
constraints of taxpayer confidentiality, HMRC should be more open
about how figures for yield from structural changes to the tax
system have been computed. (paragraph 184)
281. We are concerned that the additional yield
from the AIFM sector clearly came as a surprise to HMRC and that
it was not aware of the extent to which profit deferral using
corporate members was happening in the sector. (paragraph 185)
282. We recommend that HMRC should take
additional steps to become even more aware of developments in
the businesses from which it collects tax and particularly of
practices to which it might object. This would not only help prevent
such practices becoming embedded but, as seems to be the case
with the Alternative Investment Fund Management sector, may also
prevent the loss of a very large amount of tax. (paragraph 186)
283. We agree with our witnesses that it is entirely
appropriate for the Government to introduce a targeted anti-avoidance
rule to stop avoidance by means of tax-motivated transfers of
assets and income streams through partnerships. (paragraph 190)
The New Approach to Tax Policy-Making since 2011
284. The evidence we have heard leads us to conclude
that, although it would have been preferable not to have compressed
the first two stages of the process, the partnership consultation
carried out between May and August 2013 was well-conducted, open
and responsive. We commend HMRC and HMT for that and particularly
for their interaction with representatives of the AIFM sector.
(paragraph 212)
285. That has, however, not been the case since
December when the draft Finance Bill proposals concerning salaried
members turned out to be significantly different from the ones
discussed in the summer. We have already concluded that insufficient
time has been allowed for proper consultation on the new proposals
if the April start date is to be maintained. This constitutes
practice that is not compatible with the new policy-making process.
(paragraph 213)
286. We commend the Government, HMRC and HMT
on the quality of the consultations conducted and the tax legislation
produced since 2011 in those areas (the large majority) where
the new approach to tax policy-making has been applied comprehensively.
(paragraph 217)
287. As we recommended in past reports, we urge
the Government to examine why the new policy-making process worked
less well in a minority of cases, and take the necessary steps
to ensure a uniformly good result in all cases. In particular,
we recommend that, where the approach decided on after
the closure of a Stage II consultation differs radically from
that consulted on, the policy development timetable should be
amended. This would allow for further consultation on the revised
proposals, building on the outcome of the earlier stages, before
proceeding to publish clauses in a draft Finance Bill. (paragraph
222)
288. We were heartened to hear that the tax policy
partnership between HMT and HMRC was working more effectively
and of the measures taken to strengthen it. We recommend
that the interdepartmental Policy Partnership Oversight Group
and Budget Policy Oversight Panel build on these achievements
by taking further steps to encourage officials in both departments
to improve their tax skills and their knowledge of evolving commercial
practice, and to subject proposals to more rigorous challenge.
(paragraph 230)
289. We were disappointed, however, to be told
that a formal review into the policy partnership was not carried
out in 2011. We recommend that such a review should now
be undertaken into the effectiveness of the current division of
policy responsibilities between HMT and HMRC, including the scope
for re-balancing those responsibilities. (paragraph 231)
290. We have commented in chapter 5 on the estimated
additional yield from the proposed measures on the taxation of
partnerships that became evident only during the consultation
period. That showed that the draft impact assessment that had
been published as part of the May consultation paper was a long
way wide of the mark. We regret the apparent absence of consultation
in the earliest parts of this process. Building on the conclusions
of the Committee's 2011 report, we recommend that, whenever
possible, officials consult fully and openly with those affected
when drawing up Tax Impact and Information Notes (TIINs) and costing
tax proposals. (paragraph 234)
291. We recognise the progress made by the Government
in formalising and extending the scope and quality of consultation
processes on tax policy-making. We also understand how difficult
it is to engage with small businesses and with individual taxpayers,
but we consider that more needs to be done to devise innovative
ways of reaching out to these groups. We therefore recommend,
as did our predecessor Committee in 2011, that HMRC and HMT urgently
develop and publish comprehensive strategies for consulting smaller
businesses, non-business stakeholders and other groups. (paragraph
240)
292. We regret the lack of progress in carrying
out and publishing formal evaluations of tax changes implemented
so far. We reaffirm the recommendation of 2011 that the Government
should commit to undertaking post-implementation reviews of all
significant tax reforms, preferably with the support of independent
experts, and that their results should be published. (paragraph
247)
293. We accept the Government's reasons for not
awaiting the conclusions of the Office of Tax Simplification's
reports on partnership taxation, particularly where it was seeking
to counter tax loss. But we have sympathy with the view that the
proposals might have been developed more coherently against the
background of a clearer statement of the Government's objectives
for the overall tax treatment of partnerships. (paragraph 254)
294. We recognise the political dimension to
tax reform and the fact that the Government cannot bind the hands
of its successors. However, we agree that the Government should,
as far as possible, avoid making piecemeal, reactive changes to
the tax system. We continue to believe that tax policy would be
developed more coherently if, at the beginning of every government,
clear statements were to be published, similar to the 2010 company
tax road map. These would give details of the government's overall
strategic aims for different parts of the tax system. We recommend
this for the future. (paragraph 259)
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