One is never sure of the extent the changes in legislation are deliberately widely drawn or the consequential impact is wider than anticipated. Take professional practices as an example.

Traditionally professional practices were partnerships and the introduction of limited liability partnerships often resulted in a transfer from one partnership structure to another. HMRC’s legislation and practical applications made this a straightforward process.

In recent years professional practices have transferred activities into subsidiaries of the partnership e.g. as a staff employment company or to isolate high risk ventures or non-core service streams.  Typically these are risk mitigation strategies or for employee incentivisation reasons.  I have no doubt that some partnerships did this for tax planning as HMRC’s legislation could require the subsidiary to transact with the parent in ways which were tax efficient.  HMRC prevented this tax planning for all relationships even those where there was no tax planning motive.

Some partnerships have partners who are corporates. This could be tax efficient and was acknowledged as such by HMRC for many, many, years.  Often these corporate partners were introduced for commercial reasons.  A typical example would be a partnership which found raising debt finance difficult and therefore used a corporate partner to accumulate profits which were then lent to the partnership as a cheaper form of finance than partners paying income tax on profits and lending the net sum back to the partnership.  I have no doubt that some parties use this for tax planning purposes.  HMRC closed this opportunity down for all partnerships even those which had corporate partners for reasons which did not involve tax planning.

The unintended consequences of both those structures are broad. What I do not understand is how those changes in tax law apply to the commercial world.  For example, the ability for investors to invest in law firms is available and has been well publicised by the law society.  Investors invariably want to invest in a company.  This suggests that they would want to invest in a company in which the partnership has transferred its trade.  However, the changes outlined above would have to be considered and treated with care.  Alternatively, they could invest in a company which is a partner in the partnership.  Again the changes above would need to be treated with care.

An alternative would be to ditch the partnership and incorporate it into a company which the partners and the investor both are shareholders. Until recently incorporation could be done tax efficiently.  That has now been stopped, even if the incorporation is for commercial reasons.

I am the first to advocate legislation which prevents parties using tax ideas for non-commercial matters. However I would urge those who further consider tax legislation to understand the wider ramifications for genuine business structures.

Those who are responsible for managing professional practices should also be mindful of the implications. Intended or otherwise.

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Graeme Blair - Partner


T +44 (0)20 7874 8835

Graeme helps guide businesses through the corporate tax world. He is particularly expert at issues that property companies and professional practices have to navigate and therefore often manages large and complex assignments, many of which have an international element.

As a client of Graeme's wrote "I am increasingly impressed that when I pick up the phone to Graeme I receive robust and appropriate advice."

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