London-based consulting and outsourcing firm HedgeStart has questioned the readiness of hedge and private equity fund managers for the proposed changes to the taxation of limited liability partnerships.
In May, HMRC issued a consultation document aimed at curbing, as they saw it, the tax reduction schemes used by alternative asset managers. This practice took two forms: disguising what would otherwise be employment relationships through limited liability partnerships; and the manipulation of profit and loss allocations to achieve tax advantages. The vast majority of UK LLPs and partnerships in the hedge fund and private equity sectors may be impacted.
Laurence Parry (pictured), private client tax partner at HedgeStart and former anti-avoidance adviser within HMRC: “From my conversations, I don’t think it has fully dawned on everyone just how far-reaching these changes will be. The description of the process as a ‘consultation’ is something of a misnomer: HMRC will certainly target the areas that it considers abusive. The consultation is more around the design of the anti-abuse rules. It therefore needs to be taken very seriously and LLPs should be dusting off their partnership agreements now.”
According to HedgeStart, efforts by HMRC to re-categorise partners as employees may have unintended consequences.
“If a member is classed as an employee, then fund interests can become employment related securities,” says Parry. “And where benefits in kind rules apply, questions remain – for example with an employee loan around drawings and interest charges. Even practical aspects like the payment of pension contributions are different.”
The manipulation of profit and loss allocations through the use of ‘corporate members’ (who therefore pay corporation tax rather than income tax) will also affect many hedge fund managers. HedgeStart’s view is that this also doesn’t consider some of the wider commercial issues.
HedgeStart advises that as the outcome of the process is unknown, managers should not act precipitously but should be ready to move as soon as the situation is clear.
“It is particularly frustrating as the Government has made great claims that it wants the UK to be the best place to conduct fund activities. It seems that there is little joined-up thinking taking place between the Treasury and HMRC,” concludes Parry.