HMRC, the UK tax authority has abandoned a controversial crackdown on private equity firms, averting a potential tax hit that could have amounted to hundreds of millions of pounds in retrospective liabilities, according to a report by the Financial Times.
The decision marks a significant victory for the private equity industry, which had lobbied against changes to the tax treatment of limited liability partnerships (LLPs) introduced last year.
At the heart of the dispute was a change in HMRC’s interpretation of LLP tax rules, specifically “condition C,” which determines whether LLP members are classified as employees or self-employed based on their capital contributions. If a partner’s capital investment is below 25% of their profit share, they are considered an employee — making their firm liable for employer National Insurance contributions.
For a decade, private equity firms have structured capital contributions to meet this threshold, ensuring LLP members remain self-employed for tax purposes. However, in 2023, HMRC unexpectedly revised its stance, arguing that firms deliberately increasing capital contributions to bypass the rule could be considered tax avoidance.
This triggered a wave of concern across the private equity industry, as firms feared retrospective tax assessments and increased liabilities. The British Private Equity & Venture Capital Association (BVCA) led lobbying efforts, arguing that the change was introduced without consultation and violated established norms.
Following months of pushback, HMRC informed professional bodies earlier this month that it would reverse its position. “The amended guidance will, in effect, reverse the changes that were made in February 2024,” HMRC stated in an email seen by the Financial Times.
The move has been welcomed by the BVCA and tax experts who had warned of the upheaval the change had caused.
