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UK accountancy firms have started lobbying hard against a potential tax raid on partnership structures expected from chancellor Rachel Reeves at next month’s Budget.
The chancellor is thought to be preparing to add employer’s national insurance to the tax bills of some UK businesses that operate as partnerships, which the Centre for the Analysis of Taxation (CenTax) think-tank has estimated would affect some 200,000 people and raise £1.9bn a year.
Scrapping the national insurance contribution exemption for such partnerships would increase the marginal tax rate for partners from about 47 per cent to 54 per cent, according to Dan Neidle at Tax Policy Associates, though some firms estimate the bill will be higher.
Almost all of the top accountancy firms in the UK operate as limited liability partnerships (LLPs), as well as many law firms and private equity groups.
Private equity executives have also raised concerns about the potential changes, in what could amount to another hit on an industry targeted in last year’s Budget by sweeping changes to the way carried interest profits are taxed.
Senior representatives from some of the Big Four accountancy firms and their trade bodies began meeting ministers on Thursday to push back against the proposals.
The firms are probing whether the government has a genuine plan on LLPs or is simply testing industry reaction in the run-up to the Budget. Several people familiar with the discussions are sceptical that such a controversial policy would emerge with little consultation — months after ministers positioned the professional services sector as central to the UK’s economic growth.
A person with knowledge of discussions between lobbyists for the Big Four and government said firms might recoup the extra tax costs by putting up their rates for clients — including the UK government, which paid almost £1bn for Big Four contracts and £5bn to LLPs since last October, according to Tussell data.
One Big Four senior partner said firms might look at “alternative structures” for their business. This could include incorporating to form a classic “limited” corporate structure with directors rather than partners, or switching to a general partnership — which could avoid the tax rise — or opt to conduct more services from outside the UK.
Some firms have already begun to lay out contingency plans. “We’ve known there was a chance that this would happen. It’s been talked about for ages so it’s not a surprise,” said one senior partner at a top accountancy firm.
“A lot of firms will incorporate as a result of this,” the partner said, despite accountants’ long cultural attachment to the partnership structure, adding that this policy could push more firms into taking injections of cash from private equity investors.
Smaller, more flexible, firms could experiment with yet more novel forms of restructuring, similar to barristers’ chambers, said Nicky Owen, head of professional practices at Crowe. “There is also concern that many firms may opt to move overseas.”
Private capital executives have been looking at how any changes could impact them, given many of their firms are structured as LLPs, according to a top tax lawyer and an industry representative.
Multiple private capital tax lawyers said any changes to LLP taxation would hit the income that executives take home from the management fees on their funds, which is more dependable income than lumpy carried interest.
Any change would lead to “a material increase in employment costs for our UK LLP”, said a top executive at a large US buyout firm.
They said it would add yet “another negative” contributing to dealmakers’ decisions about where to locate themselves, after changes to the UK’s non-domicile tax and carried interest regimes.
Michael Moore, chief executive of the British Private Equity and Venture Capital Association, said: “We would urge the government to avoid implementing any further tax measures in this Budget, including measures targeting partnership profits, that would undermine investor confidence and drive investment away from the UK.”
“We have to think of the UK as to whether it’s competitive,” added the Big Four partner. “I do understand the challenges the chancellor is facing and the need to collect tax, but we can’t put the UK at a competitive disadvantage.”
The tax could even dim the attraction of becoming a partner at all. More rising stars in accountancy and consulting could opt to become salaried partners to avoid the tax — gaining the title “partner” but remaining an employee rather than owning a share of the firm and splitting its profits with other partners, according to the former senior Big Four tax partner. Hundreds of salaried partners could gain employment rights, burdening firms with providing benefits, said Owen at Crowe.
“The new policy . . . could cause the industry to collapse,” warned the senior Big Four partner. “Partnerships can fail, we know that.”
