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The Treasury has reassured senior City figures that its mooted tax raid on partnerships will be less aggressive than feared in an effort to calm nerves in the accountancy and legal sectors ahead of the Budget.
Chancellor Rachel Reeves has ruled out imposing full employer national insurance contributions on limited liability partnerships (LLPs) but is mulling introducing a lower rate instead, according to government officials.
Ministers and officials are still debating the behavioural consequences of the move, how much it would raise and whether the policy is worth introducing at all.
Lawyers and accountants have been lobbying hard against the idea of paying NICs on partner profits, which could affect about 200,000 people and raise £1.9bn a year if applied at the usual rate of 15 per cent.
Most big law and accountancy firms in the UK operate as LLPs, allowing them to benefit from advantageous tax treatment.
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.
The chancellor has accused some wealthy groups of “bleating” about the tax rises in her first Budget last October, notably on non-doms and private school fees, in a message intended to reassure the left of the Labour party.
But while LLPs had been braced to pay the full rate of employer national insurance, allies of the chancellor said the rate now being considered was lower. One said the policy under discussion was “not aggressive” compared with industry’s expectations.
Another measure being considered is a salary exemption, so that employer NICs would not apply to partners paid below a certain level.
Accounting and legal industry leaders on Thursday met Liz Lloyd, Sir Keir Starmer’s former director of policy delivery and now a minister spanning the Departments for Science, Innovation and Technology and for Business and Trade, according to four people familiar with the meeting. One said the industry bodies and senior partners at accounting and law firms made their points “forcefully”. Another person present argued that adding employer NICs to LLPs would not raise as much revenue as the government expected and that partners had a choice of other jurisdictions to base themselves in.
The City of London Law Society wrote to the chancellor this week expressing concerns over the potential changes, stating that “while the legal profession recognises the importance of a fair and effective tax system . . . [it] could have unintended consequences for one of the UK’s most globally competitive and economically valuable sectors”.
The Institute of Chartered Accountants in England and Wales is surveying its 210,000 members on whether they support or oppose the policy, including whether it would slow the sector’s growth or spark “more offshoring of high-value work”. Chief executive Alan Vallance warned in a letter last week that the tax “would harm one of the UK’s most successful growth sectors and risk reducing, rather than increasing, overall tax receipts”.
While some law and accounting firms have said privately that they will consider changing their corporate structures to become limited companies or general partnerships if NICs significantly increase their costs, other large law firms signalled they would absorb the cost given the difficulties of moving away from being an LLP.
Any change could reduce the record numbers of partners being hired by London law firms in recent years, spurred by the expansion of American firms in the City and the multimillion-pound pay packages on offer.
