Last month, the CenTax think tank published a policy paper recommending the introduction of a new NIC charge (‘partnership NICs’) in relation to partners. CenTax portrayed this as a way of equalising the NICs treatment of employees and partners – currently, partners are generally treated as self-employed for tax purposes such that, unlike employees, there are no secondary Class 1 NICs on their remuneration.
Recent press speculation suggests that the Chancellor is now preparing to introduce partnership NICs, although, at this stage, there has been no official comment from the Government. This commentary discusses the potential implications of partnership NICs for the asset management sector.
What might partnership NICs look like?
We do not know how any new charge would be structured (including whether it would be limited to LLPs or apply to all partnerships), but, assuming that inspiration is taken from the CenTax proposals, it may be similar to employer NICs, so that it would:
In this regard, it is worth noting that in practice most LLP members already have (for various reasons, such as non-deductible expenses) a real tax rate in excess of the headline 47% rate (45% income tax plus 2% self-employed NICs).
CenTax recommends that the NICs are charged as ‘a “top-up” rate on partners’ Income Tax payments’, seemingly on the basis that a partnership’s tax transparency would prevent it administering them. However, it is hard to see why partnerships could not simply be treated as opaque for partnership NICs purposes.
Of course, aside from these high-level points of design, all sorts of detail would need to be thought about when configuring the partnership NICs rules. For example, we do not know the extent to which partnership NICs would apply to non-UK residents, which is very relevant to asset management businesses, which commonly have an international workforce. Further, partnership NICs are not expected to apply to the profits of investment partnerships, so it would be important that care is taken to ensure that any rules do not inadvertently catch carried interest treated as trading profit under rules coming into force next April.
A possible ‘benefit’ of the imposition of partnership NICs would be if it led to the Government repealing the salaried members rules. Although these have additional tax-raising advantages to just generating employer NICs (for example, PAYE applies), it is hoped that the Government would be prepared to forego these in the interests of simplicity.
Timing
From a practical perspective, the earliest feasible date for implementation is probably 6 April 2026. However, given the significance of the introduction of a new form of NICs, it is hoped that a thorough consultation process would be undertaken, and it is hard to see how that could be accomplished in that timescale.
What would partnership NICs mean for the asset management sector?
At a macro level, the introduction of partnership NICs would likely make the UK a less appealing location for asset managers, especially in light of the recent abolition of the non-dom regime and the upcoming reform of the carried interest tax rules. Asset management is a highly mobile sector, and with rival European fund jurisdictions taking steps to improve their tax offerings to the sector in recent years, the introduction of partnership NICs could lead to businesses and executives leaving (or not coming to) the UK, with knock-on consequences for the UK’s position as a global hub for asset management.
It is worth noting that investment funds have been increasingly investing in professional services businesses structured as LLPs, and so the imposition of partnership NICs could reduce the profitability of these investments, and consequently investment in affected industries.
For asset management (and other) businesses structured as LLPs, a crucial question will be whether the LLP business model is still appropriate – the answer to which will depend on more than just the tax position.
Options for restructuring could include:
Neither of these routes would reduce the headline NIC charge, but they would have certain advantages, including improving the tax efficiency of reinvesting profits in the business, as those profits would have been subject to lower corporation tax rates.
If an LLP is to be converted to a corporate (option 1 above) this could be achieved in different ways, for example, a transfer of the business to a new company. Which route would be appropriate is likely to depend on the structure and preferences of the specific asset manager. There would be a number of non-tax issues to consider, in particular, for FCA authorised businesses (which asset managers are likely to be), the regulatory position.
From a tax perspective, the key concern in relation to the conversion process will be to ensure that it is as close to tax neutral as possible. In this regard, it is common for a significant amount of the value of asset management businesses to be located in their intangible assets. This can lead to complex issues, especially where, as is commonly the case for larger international asset managers, there is a corporate member with significant ownership rights, as the corporation tax intangibles fixed asset code will need to be navigated.
Introducing partnership NICs would be a significant reform, and it is hoped that the Government carefully considers all the consequences, including its cumulative impact, alongside other recent tax changes, on the asset management sector.
Last month, the CenTax think tank published a policy paper recommending the introduction of a new NIC charge (‘partnership NICs’) in relation to partners. CenTax portrayed this as a way of equalising the NICs treatment of employees and partners – currently, partners are generally treated as self-employed for tax purposes such that, unlike employees, there are no secondary Class 1 NICs on their remuneration.
Recent press speculation suggests that the Chancellor is now preparing to introduce partnership NICs, although, at this stage, there has been no official comment from the Government. This commentary discusses the potential implications of partnership NICs for the asset management sector.
What might partnership NICs look like?
We do not know how any new charge would be structured (including whether it would be limited to LLPs or apply to all partnerships), but, assuming that inspiration is taken from the CenTax proposals, it may be similar to employer NICs, so that it would:
In this regard, it is worth noting that in practice most LLP members already have (for various reasons, such as non-deductible expenses) a real tax rate in excess of the headline 47% rate (45% income tax plus 2% self-employed NICs).
CenTax recommends that the NICs are charged as ‘a “top-up” rate on partners’ Income Tax payments’, seemingly on the basis that a partnership’s tax transparency would prevent it administering them. However, it is hard to see why partnerships could not simply be treated as opaque for partnership NICs purposes.
Of course, aside from these high-level points of design, all sorts of detail would need to be thought about when configuring the partnership NICs rules. For example, we do not know the extent to which partnership NICs would apply to non-UK residents, which is very relevant to asset management businesses, which commonly have an international workforce. Further, partnership NICs are not expected to apply to the profits of investment partnerships, so it would be important that care is taken to ensure that any rules do not inadvertently catch carried interest treated as trading profit under rules coming into force next April.
A possible ‘benefit’ of the imposition of partnership NICs would be if it led to the Government repealing the salaried members rules. Although these have additional tax-raising advantages to just generating employer NICs (for example, PAYE applies), it is hoped that the Government would be prepared to forego these in the interests of simplicity.
Timing
From a practical perspective, the earliest feasible date for implementation is probably 6 April 2026. However, given the significance of the introduction of a new form of NICs, it is hoped that a thorough consultation process would be undertaken, and it is hard to see how that could be accomplished in that timescale.
What would partnership NICs mean for the asset management sector?
At a macro level, the introduction of partnership NICs would likely make the UK a less appealing location for asset managers, especially in light of the recent abolition of the non-dom regime and the upcoming reform of the carried interest tax rules. Asset management is a highly mobile sector, and with rival European fund jurisdictions taking steps to improve their tax offerings to the sector in recent years, the introduction of partnership NICs could lead to businesses and executives leaving (or not coming to) the UK, with knock-on consequences for the UK’s position as a global hub for asset management.
It is worth noting that investment funds have been increasingly investing in professional services businesses structured as LLPs, and so the imposition of partnership NICs could reduce the profitability of these investments, and consequently investment in affected industries.
For asset management (and other) businesses structured as LLPs, a crucial question will be whether the LLP business model is still appropriate – the answer to which will depend on more than just the tax position.
Options for restructuring could include:
Neither of these routes would reduce the headline NIC charge, but they would have certain advantages, including improving the tax efficiency of reinvesting profits in the business, as those profits would have been subject to lower corporation tax rates.
If an LLP is to be converted to a corporate (option 1 above) this could be achieved in different ways, for example, a transfer of the business to a new company. Which route would be appropriate is likely to depend on the structure and preferences of the specific asset manager. There would be a number of non-tax issues to consider, in particular, for FCA authorised businesses (which asset managers are likely to be), the regulatory position.
From a tax perspective, the key concern in relation to the conversion process will be to ensure that it is as close to tax neutral as possible. In this regard, it is common for a significant amount of the value of asset management businesses to be located in their intangible assets. This can lead to complex issues, especially where, as is commonly the case for larger international asset managers, there is a corporate member with significant ownership rights, as the corporation tax intangibles fixed asset code will need to be navigated.
Introducing partnership NICs would be a significant reform, and it is hoped that the Government carefully considers all the consequences, including its cumulative impact, alongside other recent tax changes, on the asset management sector.
