The heads of tax from the Big Four firms have told a House of Lords committee that it is unclear how proposed changes to the rules around limited liability partnerships (LLPs,) due to come into force on 6 April, will work in practice, or whether they will result in the tax gains forecast by HMRC.
The comments were made in evidence to the Economic Affairs Finance Bill Sub-Committee which is considering the draft finance bill and looking particularly at the operation of new regulations around the use of LLPs in the alternative investment sector by organisations such as hedge fund operators.
Jane McCormick, KPMG head of tax, highlighted concerns that some of the detailed guidance released in December appears to go further in some areas than the original legislation. 'For example, in the legislation definitions of disguised salary depend on this being "substantially wholly" a proportion, whereas in the guidance it says 80%,' she said.
McCormick also pointed to a lack of clarity around what constitutes 'capital invested' in the partnership and whether a long-term loan would meet the criteria.
The Big Four representatives warned that it would prove time consuming and costly for mixed partnerships to work out where each partner stood in relation to the new rules. The tax heads also said that HMRC's decision to align the new tests and rules with the tax year rather than allowing partnerships to use their own year ends would lead to more confusion as there would need to be a period of transition in many instances.
They were critical of HMRC's proposed three tests to determine whether or not an individual was classed as a partner, saying that a requirement to show that 20% of the member's expected remuneration is related to the profits and losses of the business as a whole in order to prove this is not disguised remuneration is 'too mechanical'.
Bill Dodwell, Deloitte head of tax policy, said: 'This approach can be easy for administrators, but it doesn't include the qualitative analysis we think is essential for getting the right answer for any assessment of partnership.'
Lord MacGregor, chair of the Economic Affairs Finance Bill Sub-Committee asked the tax experts if they were in agreement with HMRC that introducing changes to the LLP rules would result in the alternative investment fund sector paying an additional £680m in tax in 2015-16. All four said they had 'no idea' how HMRC had arrived at this calculation, or whether the increase in tax take was achievable.