The UK’s limited liability partnership model is facing mounting pressure from HMRC, even after surviving a Budget day scare last autumn that threatened to reshape the sector.
The LLP structure, widely used by law firms and accountancy firms, has been in force for 25 years and allows members to avoid corporate tax on profits in exchange for investing personal capital and bearing financial risk.
In the weeks before the Autumn Budget, speculation mounted that Chancellor Rachel Reeves was considering taxing LLP firms, leaving more than 50,000 businesses anxious about their future.
After sustained lobbying from across the professional services sector, including from legal bodies who argued the proposal made no “logical sense”, the Treasury backed down and dropped the plan entirely.
However, the pressure on LLPs did not ease after Budget day, with HMRC now pursuing the model through the courts with notable success.
Miles Dean, head of international tax at Andersen, warned that “the LLP model in financial and professional services is under coordinated assault.”
Two cases are currently before the Supreme Court, each focused on complex tax issues arising from LLP structures used across hedge funds, private equity, and professional services firms.
The first of those cases reached its conclusion this week, centring on trading firm HFFX LLP, which is owned by Russian-born British billionaire financial trader Alex Gerko.
HFFX LLP had attempted to reduce its team’s tax bills by routing bonuses through a corporate partner that held the funds for three years before paying them out, a structure HMRC challenged vigorously.
The Supreme Court rejected HMRC’s initial argument that the deferred bonuses should be taxed immediately as regular profit, but agreed with the taxman’s secondary position that the payouts become taxable income once received, which was widely regarded as a meaningful win for HMRC.
The second pending case involves hedge fund BlueCrest Capital Management, founded by Michael Platt, identified as the UK’s wealthiest financier, with nearly 200 million pounds of tax at stake if the firm loses.
That case centres on the salaried members’ rules, which determine whether LLP members are genuinely self-employed or should be classified as disguised employees for tax purposes.
Dean warned that “behind the litigation sits the real threat of a ‘partnership NIC'”, signalling concern that further fiscal pressure on the sector may follow regardless of individual court outcomes.
He noted that “partners already face effective rates near or above 50 per cent, carry genuine capital at risk, and enjoy none of the protections available to employees,” adding that taxing them as though they do “would not be fair.”
Dean further described the situation as “a revenue grab on a soft target, a strange way to treat the firms underpinning the UK’s standing in global finance and law.”
Matthew Harrison, partner at Vialto Partners, noted that “most of these cases involve arrangements put in place over a decade ago,” and suggested that “HMRC may have been a little slow to recognise that the same does not apply to partnerships” when applying employment tax thinking to the LLP model.