This was another relatively quiet Budget for the professional practices sector.
There was some clarification on HMRC’s ability to amend LLP members’ returns where an LLP submits a partnership tax return on the basis it is operating ‘with a view to profit’ and is subsequently found to be operating without a view to profit. As this measure preserves the status quo for the vast majority of LLPs, most professional practices will not see any change in their obligations or liabilities.
The Government has also confirmed that, following a number of changes to the draft off payroll working rules, commonly known as IR35, the reform will be legislated in Finance Bill 2020 and implemented on 6 April 2020 as previously announced.. The rules will be extended to private sector organisations, including LLPs and partnerships, which will see the responsibility for correctly operating PAYE and accounting for NICs moving from the ‘contractor’ to the engaging organisation. This could present an increased risk for professional practices potentially becoming liable for PAYE and employer NICs in respect of payments to contractors engaged through an intermediary company or a personal service company (PSC). Such arrangements can commonly be used where professional practices retain the services of retiring partners as consultants.
There was otherwise a continued focus on encouraging investment within UK business, with businesses being incentivised to spend money on environmentally friendly vehicles, and on newly constructed or renovated office buildings by increasing the structures and buildings allowance (SBA) by 1% to 3% from 6 April 2020.
The same cannot be said for incentivising entrepreneurial individuals or those wishing to save for their retirement.
The lifetime limit for Entrepreneurs’ Relief sees a reduction from £10m to £1m for qualifying disposals made on or after 11 March 2020. While this is not anticipated to affect the majority of individuals within professional practices, there may be situations where a value might be placed on an individual’s interest in an LLP or partnership, which could create a liability to capital gains tax when they depart.
Changes to pension contribution limits for high earners will also be introduced. The minimum tapered pension annual allowance will be reduced from £10,000 to only £4,000, which will come as a blow to high-earning partners with income over £312,000. It is therefore even more important to ensure that any unused annual allowance in the previous three tax years is utilised before it is lost. On the flip side, the thresholds at which the annual allowance is tapered will be increased by £90,000.
Clarification of treatment of Limited Liability Partnership (LLP) tax returns
The Government will legislate to put beyond doubt that LLPs should be treated as general partnerships under income tax rules.
The new rules will ensure that HMRC can continue to amend LLP members’ tax returns where the LLP operates without a view to profit. This will only apply where an LLP has delivered an LLP partnership tax return on the basis that is operating ‘with a view to a profit’ and is subsequently found to be operating ‘without a view to a profit'.
A recent First-tier Tribunal decision drew attention to the validity of the income tax return enquiry process where an LLP was found not to be trading with a view to a profit.
If HMRC had issues with the trading status of the LLP it could, and should have, opened concurrent enquiries into the individual members' returns. In this case, and presumably many others, it failed to do so.
The legislative change will, and is intended to, have a retrospective impact to rectify the issue for HMRC.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.