HMRC ditches crackdown on private equity tax

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The UK tax authority has reversed a crackdown that private equity and professional services firms had feared would result in hundreds of millions of pounds of retrospective tax liabilities.

HMRC made unexpected changes last year to the tax treatment of members of limited liability partnerships — a structure used by many private equity, accounting, legal and other professional services firms — opening investigations and seeking backdated tax.

After industry lobbying and as the UK government seeks to reset relations with business after a backlash caused by the Budget in autumn, HMRC contacted several professional bodies earlier this month confirming it intended to reverse course.

“The amended guidance will, in effect, reverse the changes that were made in February 2024,” HMRC said in the email, which has been seen by the Financial Times.

The change was welcomed by the British Private Equity & Venture Capital Association and the Chartered Institute of Taxation.

The row was about changes to rules introduced in 2014, which set out criteria for judging whether members of limited liability partnerships were self-employed or employees. Before 2014, LLP members, usually known as “partners”, were generally accepted as self-employed.

Under the rules, if an individual is deemed to be employed, their employer must pay National Insurance contributions of 13.8 per cent of employee pay, due to rise to 15 per cent from April.

One part of the tax rules — “condition C” — relates to how much capital a member contributes to the limited partnership. If it is less than 25 per cent of their profit share, they are deemed an employee. That has meant partnerships have tried to ensure capital contributions exceed the 25 per cent threshold.

However, HMRC last year changed its guidance to say that purposefully failing the condition by making excessive capital contributions could fall foul of tax-avoidance rules.

The BVCA lobbied the government, complaining that the change had been introduced without consultation and was potentially retrospective.

Jitendra Patel, tax principal at accountancy firm BDO said last year’s change “had felt like retrospective action” because the tax rules had been in place for 10 years. In that time, HMRC had previously assured firms they could meet the condition C rule by ensuring capital contributions were above the threshold, he said.  

It was “welcome” that the tax authority had changed course, he said, but in the meantime affected businesses had experienced “lots of upheaval” and spent time and money preparing to defend their position.

HMRC said: “Having conducted a thorough review and listened carefully to industry representatives, we’ve decided that the anti-avoidance rule does not apply where top-ups are genuine, intended to be enduring and give rise to real risk.”

Christopher Thorpe, technical officer at the CIOT, said: “We’re pleased that HMRC have agreed to change their interpretation of condition C, as their previous interpretation could have equated perfectly innocuous and commercial investments with abusive actions.”