With the Autumn Budget expected this month, Chancellor Rachel Reeves is reportedly preparing to announce a new charge on workers using a Limited Liability Partnership (LLP) business structure. The move is designed to raise around £2 billion towards filling a public finance gap estimated between £30 billion and £50 billion.
While LLPs have long been favoured for their flexibility and tax transparency, particularly amongst professional practices, the potential reforms could significantly reduce these benefits, and giving business owners reason to look at their corporate structures.
If Rachel Reeves’ proposals lead to changes in how LLPs are taxed or regulated, it’s possible that businesses could reconsider the LLP structure, depending on the specifics of the reform.
To understand whether this would cause businesses to move away from the LLP structure, here are a few factors to consider:
Tax Changes: If the proposed reforms involve increasing the tax burden on LLPs, particularly around how profits are distributed or how income is taxed, businesses might look for alternative structures (like limited companies or sole traders) to reduce their tax liabilities.
Administrative Complexity: If new regulations make it more complex or costly to operate an LLP (for example, requiring more stringent reporting or compliance), some businesses might choose a simpler corporate structure instead, such as a limited company, which offers clear liability protections but with a different tax regime.
Flexibility of LLPs: One of the main draws of the LLP structure is its flexibility. Unlike a traditional limited company, LLPs allow for a more bespoke management structure, where partners can be active or passive, and profits can be distributed without the strict rules that govern companies. If any reform threatens this flexibility, businesses could consider moving away from LLPs.
Industry-Specific Factors: Some sectors, like law firms and accountancies, have heavily relied on LLPs because of the way profits can be shared among partners. In those industries, a move away from the LLP model could be more disruptive and might take longer to happen, depending on how the reform plays out.
Ability to attract investment: One of the criticisms of the LLP structure is that whilst it can be relatively straightforward to add new Partners to the structure, attracting private equity or institutional investment can be more challenging. If the tax benefits of being an LLP are reduced, greater emphasis might be put on the other edge of the double edged sword.
Will businesses actually move away?
It’s hard to say definitively, but businesses are generally reactive to changes in taxation and regulation, especially if those changes could result in higher costs or greater complexity. A major change in how LLPs are taxed or regulated could cause a shift, but it would likely depend on the severity of the changes. For example, if the reform creates a substantial tax disadvantage for LLPs but doesn’t offer any compensating benefits, businesses might start restructuring. This could mean a move to a different corporate vehicle altogether or a restructuring of the partnership itself.
Regard should also be had to the individual circumstances of the Partners – who may personally suffer a significant prejudicial shift in their own tax position as a result of any changes.
A Strategic, Not Reactive, Decision ?
Even before the Budget, many LLPs were already weighing the benefits of switching to alternative structures The current proposals may well bring the issue to the forefront.
A proactive review can ensure your structure still supports your commercial objectives, protects profitability, and aligns with how clients, investors and regulators expect modern businesses to operate.
How Primas Law Can Help ?
At Primas Law, we have extensive experience advising businesses on the most suitable structures for their commercial and tax needs. Our team regularly supports LLPs and limited companies across sectors including law, accountancy, healthcare and professional services.
If you’re considering how these potential changes could affect your business – or whether restructuring could be beneficial – our Corporate team would be happy to help.