HMRC U-turns on Private Equity Tax Crackdown

HMRC has reversed its controversial tax clampdown on members of limited liability partnerships (LLPs), following pressure from the private equity and professional services sectors. The move comes after concerns that the changes could have triggered hundreds of millions of pounds in backdated tax liabilities.

Last year, HMRC unexpectedly altered its interpretation of the rules for LLPs – commonly used by private equity, legal, and accountancy firms – and began investigations into firms past tax arrangements. However, after industry lobbying and in an effort to rebuild ties with the business community post-Budget, HMRC confirmed it will withdraw the changes.

“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.” said HMRC, following a review and talks with industry bodies.

The Chartered Institute of Taxation (CIOT) welcomed the decision. Technical officer Christopher Thorpe said: “We’re pleased HMRC has revised its view of condition C, as their previous interpretation could have equated perfectly innocuous and commercial investments with abusive actions.”

In an email seen by the Financial Times, HMRC informed professional bodies earlier this month that it would effectively reverse the changes made in February 2024.

The British Private Equity & Venture Capital Association (BVCA) and the CIOT both welcomed the reversal.

The dispute centred on rules introduced in 2014, which determine whether LLP members are treated as self-employed or employees. A key test – known as condition C – requires members to contribute capital equal to at least 25% of their profit share to be considered self-employed. Falling short of this threshold triggers employer National Insurance contributions.