UK Government Announces Consultation in respect of Partnership Taxation – Possible Impact for Asset Managers and Investment Funds

March 25, 2013


Following the UK Government’s announcement at the end of December 2012 that it would be considering the taxation of partnerships, it was announced in the UK Budget last week that a consultation will commence in the Spring that will consider this area. This is with a view to legislation being enacted in 2014 to counter perceived tax avoidance. In particular, measures will be proposed to:

a) remove the presumption of self-employment for partners in limited liability partnerships (“LLPs”) - this could result in such entities having to withhold UK income tax under the PAYE scheme and pay employer national insurance contributions in respect of those partners who are currently classified as self-employed but are viewed by HM Revenue & Customs as employees; and

b) counter the manipulation of profit/loss allocations by partnerships in order to secure tax advantages.

Employees or Partners?

LLPs with properly drafted LLP agreements will hopefully be compliant with any changes but a review is likely to be necessary to ensure that partners in the LLP have sufficient “badges” of self-employment (i.e. there are sufficient facts/evidence that the individuals are not technically employees). This is intended to close down the practice of promoting relatively junior individuals to partner to reduce the LLP’s national insurance costs where such individuals do not in HM Revenue & Customs’ view have sufficient rights and responsibilities to be treated as other than employees.

Allocation of Profit and Income

It is unclear what the UK Government intends to do with regard to the ‘manipulation’ of profit/loss allocations to partners. The Budget statement suggests that the Government intends to look at this issue in all types of partnerships so including limited partnerships as well as LLPs. It is also possible that the scope of the consultation could broaden beyond what is currently proposed if the initial consultation highlights other practices HM Revenue & Customs regard as ‘manipulative’ or unfair. Consequently, this and any subsequent consultations could result in significant restrictions on the existing freedom of partnerships to allocate profits among partners. The consultation document is expected to be published in the next couple of months which will provide more detail on these proposals. Following this it may be necessary for partnerships and LLPs to review their profit allocation provisions and how they operate across jurisdictions in which their investors and general partners/management teams are based.

The UK Budget last week was overall positive for businesses, including specific tax measures that will support asset managers based in the UK. The Government in conjunction with the UK Treasury seem committed to making the UK competitive in the investment management sector. However, legislation that ultimately emanates from this consultation on partnerships may have a more negative impact on the industry in the UK if unduly restrictive.

We will provide you with further updates as the consultation document is published and the consultation progresses.

International Law Office (2012) - “Client Choice Award 2012 - UK Corporate Tax”

Legal Business Awards (2013) - Private Equity Team of the Year

For more information, please contact Jan Birtwell at jbirtwell@omm.com or Rachel Hawkins at rhawkins@omm.com.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Jan Birtwell, an O'Melveny partner licensed to practice law in the Supreme Court of England and Wales, and Rachel Hawkins, an O'Melveny associate licensed to practice law in the Supreme Court of England and Wales contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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