Lawyers and accountants warn Reeves against tax raid on partnerships

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Lawyers and accountants have hit out at plans being considered by Rachel Reeves to make partners pay more tax through national insurance contributions, arguing that such a raid would hit a cornerstone of the UK economy.

The chancellor is preparing to add national insurance on to the tax bills of some UK professionals, which the CenTax think-tank has estimated would affect some 200,000 people and raise £1.9bn a year.

Most big law and accountancy firms in the UK operate as limited liability partnerships, which allows them to benefit from advantageous tax treatment despite securing high margins.

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.

He calculated it would reduce take-home pay for a partner at a large law firm earning £2mn from £1.072mn to £934,000.

“Law partnerships don’t get the same tax breaks for investment as other businesses but are now having to pay the same levels of tax,” said David McNeill, director of public affairs at the Law Society of England and Wales.

Corinne Staves, head of partnership at the law firm CM Murray, said Reeves’ proposal was “completely at odds with the government’s stated aims” to grow the professional services industry, one of the main drivers of the British economy.

Reeves said last week that taxing the wealthy would be “part of the story” as she seeks to fill a fiscal hole estimated by economists at between £20bn and £30bn.

But she insisted she would seek to “get the balance right” to ensure Britain attracted and retained wealth creators.

The chancellor’s decision to look at changing the tax treatment of LLPs in the November 26 Budget was first reported by the Times. The Treasury declined to comment on Budget “speculation”.

One senior partner at a top accountancy firm said the “annoying and expensive” proposals would probably lead to many firms moving away from their LLP structures and incorporating as companies.

Some high-earning partners might even leave the UK altogether to avoid the tax, said Vipul Sheth, managing director of accounting outsourcing provider Advancetrack.

“Policymakers appear intent on undermining [the] competitiveness” of the services sector, he said, adding: “Increasing the brain drain seems a perverse way to increase tax collection.”

However, many professionals operating in regulated industries such as law have UK qualifications that may limit their ability to practise overseas.

Last week, Reeves accused some wealthy groups of “bleating” about higher taxes in her first Budget, notably on non-doms and private schools, in a message intended to reassure the Labour left that she has the rich in her sights.

The Treasury maintains that predictions of a wealth exodus from Britain as a result of tax changes to the non-dom regime announced last year were overblown, something that has emboldened the chancellor.

Staves at CM Murray said Reeves’ proposals were likely to have the biggest impact on mid-market and smaller firms, which are already struggling under increasing costs.

She warned that some such firms may collapse, creating “significant risks for consumers of professional services”.

Tom Margesson, tax partner at Travers Smith, said the measure would also negatively impact asset management firms, which are often structured as partnerships.

“From an asset management perspective, this would be extremely damaging — especially coming so soon after changes to carried interest taxation and the abolition of the non-dom regime,” he said.

“The risk to the UK’s status as an asset management hub is very real,” Margesson added. “If European HQs shift to the continent, we’re talking about much more than just partnership tax at stake.”

Adam Craggs, partner and head of tax disputes, regulatory and financial crime at RPC, a law firm, said that in the current economic climate, “any additional cost burden on businesses will be difficult to absorb” for some firms.

Sean Bannister, chartered tax adviser at law firm Edwin Coe, said Reeves’ proposal “misunderstands partnerships”, which often “have their own capital at risk”.

“To target them again would deal a heavy blow to firms already managing rising costs,” he said.