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Law firm model at risk as Hammond reveals plans to tackle ‘partnership taxation’ in autumn statement

In a move which could curb law firms’ ability to share profits based on actual performance, yesterday’s (23 November) Autumn Statement by Chancellor Philip Hammond revealed plans to shake up profit sharing arrangements in partnerships.

Hammond (pictured) said that the government will ‘legislate to clarify and improve certain aspects of partnership taxation.’ The government is expected to propose partnerships must decide their profit-sharing arrangements at the beginning of the tax year rather than at the end, regardless of how individuals perform over the year.

Critics in the industry argue the proposals risk crippling firms’ ability to share profits based on actual performance, and this would undermine efforts by law and accountancy firms to reward partners fairly.

UHY Hacker Young tax partner Roy Maugham said: ‘Tens of thousands of businesses in the UK, across professions like law, accountancy and investment management, are structured as partnerships and LLPs in order to reward senior individuals fairly according to their actual performance over the year.’

‘These proposals threaten to break that critical link between performance and remuneration, something that seems to runs contrary to basic fairness.’

‘It also removes one of the key attractions of partnership and LLP structures, and will worry financial and professional services firms enormously. The government needs to tread very carefully before making far-reaching changes to taxation in professions where the UK is a genuine world leader, and unnecessarily making them less competitive.’

The government also announced a new legal requirement for intermediaries arranging complex structures for clients holding money offshore to notify HMRC of the structures and the related client lists, which to some is a new headache for the profession to deal with.

Pinsent Masons tax head Jason Collins added: ‘This brand new reporting burden will potentially affect lawyers, accountants, banks, fund providers and trust and company service providers, located both in the UK and overseas.’

‘One has to wonder why this is needed given that the Common Reporting Standard is effective this year and will provide much of this information anyway. This is a step taken by HMRC on its own – and another example of the UK wanting to drive the agenda.’

‘Given the almost universal response from the professions and banks was that the measure was too broad and too aggressive, it is hoped that the penalty will only apply to avoidance dreamt up by promoters and mass-marketed to taxpayers, rather than a taxpayer taking bespoke professional tax advice on their individual circumstances. If it applies to the latter, you will have trouble finding anyone willing to give tax advice anymore, and that would be unacceptable and counterproductive.’

Hammond also noted yesterday that the Brexit decision makes more urgent than ever the need to tackle the economy’s weaknesses. He said that over the forecast period, growth is expected to be 2.4% lower than forecast as a result of Brexit. In 2017, growth is to fall to 1.4%.