Tax changes proposed by the Government to close a ‘disguised employment’ loophole by the creation of some Limited Liability Partnerships (LLPs) are set to impact ‘perks’ including company cars and fuel.
HM Treasury was unable to tell Fleet News how many people and company cars may be impacted, but Alastair Kendrick, tax director at chartered accountants MacIntyre Hudson, estimates it could involve at least 250,000 vehicles.
Meanwhile, a First-Tier Tribunal, which hears appeals against decisions relating to tax made by HM Revenue and Customs (HMRC), ruled that four members of the same family circumvented tax rules relating to cars and fuel by running parallel company and partnership structures.
LLPs have become increasingly popular as a method for carrying on a wide variety of businesses since they were introduced by the LLP Act 2000.
According to Companies House, there are more than 50,000 LLPs which give the benefit of limited liability for members with the tax treatment and flexibility of a traditional partnership.
HMRC concerned LLP legislation is being flouted
When LLPs were introduced, they were primarily envisaged, according to HMRC, as being the commercial vehicle for professional firms, such as accountants and solicitors.
However, HMRC is concerned that LLP legislation is being flouted. It is suggesting that LLPs are flourishing across business with members benefiting from default partner status, even if the terms of their engagement are tantamount to employment.
As a result, some LLPs are able to avoid their employment tax obligations. Kendrick said: “HMRC has concerns that, for some time, people who are company directors have been forming an LLP through which they provide a range of benefits and so escape benefit-in-kind (BIK) tax and Class 1A National Insurance.
“It would not be making this move if it did not believe there was a substantial amount of revenue at stake.”
HMRC proposes that from April 6, 2014, salaried LLP members will be taxed as employees for both income tax and NIC purposes, including benefits in kind.
However, HM Treasury played down the suggestion that company cars are being used as a method to avoid tax.
HMRC says existing evidence suggests that the majority of partnerships, irrespective of size, will not be affected, with members continued to be taxed on the private element of the cost of running a car with no BIK tax or employer Class 1A NI contributions due.
Change could raise £1.075 billion
Nevertheless, HMRC estimates that if the ‘disguised employment’ rule change is introduced alongside a second regulation change impacting on “the manipulation of profit or loss allocations by some partnerships (not just LLPs) to achieve a tax advantage” it could raise £1,075bn over the next four years.
Publication of the consultation document Partnerships: A Review of Two Aspects of the Tax Rules follows last year’s First-Tier Tribunal decision.
Relatives David and Paul Cooper were directors of Leaside Timber and Builders’ Merchants, of Hoddesdon, Hertfordshire. They were also partners in Cooper Management Services, along with David Cooper’s wife, Susan, and his son, Nicholas (who were not directors or employees of the company), providing administrative services to the timber company.
The partnership provided cars and car fuel benefits to all the partners and the cars were available for their private use.
The tribunal heard that the amount of tax at issue was “significant” and amounted to about £70,000 in the case of the company and £145,000 in the case of the individuals dating as far back as 2002/3.
The tribunal ruled the company was “complicit in the provision of the cars and the car fuel” to the individuals, and concluded the benefits would not have been provided had David and Paul Cooper not been directors of the timber firm.
There was “no commercial rationale” for the partnership to provide the vehicles to its partners because they did not run the business.
The tribunal said: “Cooper Management Services is little more than an extension of the company set up and operated in order to avoid or reduce an income tax charge for the individual appellants and a National Insurance contributions liability for the company.”
Vehicles could be ‘extracted’ from LLPs
Kendrick said: “Consideration should be given to the rationale and commerciality of existing and proposed parallel partnerships and company structures, particularly where cars are provided by the partnership to the partners.
“As HMRC is likely to start taking a greater interest, it is likely those who have historically entered into such arrangements may be made the subject of review and HMRC may look for settlement of earlier year liabilities together with interest and penalties.”
If the tax change is introduced, Kendrick believes that prior to April 6 next year, those who have established such organisations will take their vehicle private by ‘extracting’ it from the LLP by paying the market value of the model at the time of transfer and then claiming a mileage allowance from their company.