Government backtracks on tax hike for private equity firms
The government has reversed a decision to hike taxes on private equity firms by ditching changes to the tax treatment of members at limited liability partnerships (LLPs).
The new guidelines, which were released last year, targeted salaried members on what tax contribution they pay, which affected the partner compensation at most firms.
Before the new changes, members were taxed as employees unless they had a significant variable profit share, significant influence over the LLP, or made a substantial capital contribution (at least 25 per cent of annual fixed compensation).
However, the new guidance disregarded the capital contributions exemption, leaving many members who had not been paying National Insurance contributions liable to be charged the tax.
Much of the professional services industry falls under this rule, as law firms, accountancy firms, private equity and many consultancies tend to operate as an LLP.
Now, HMRC has backtracked on the decision, revealed in letters to professional bodies across the affected sectors.
“The amended guidance will, in effect, reverse the changes that were made in February 2024,” HMRC said in an email seen by City PM.
Majid Hussain, partner and head of private client at Haysmac, described the U-turn as a “necessary correction,” but said that the fact that firms were “left in limbo” highlighted “broader concerns about the UK’s tax policy unpredictability”.
“The sudden change in guidance last year created significant uncertainty for private equity and professional services firms, undermining long-standing assurances from HMRC about capital contributions and partnership structures,” he added.
The private equity industry is also still fighting the government on its proposals to treat carried interest returns as trading income rather than investment returns, making them subject to income tax instead of capital gains tax.
Last year, Chancellor Rachel Reeves stepped back from the full-scale raid feared by some in the industry, lifting the tax from 28 per cent to 32 per cent.
According to Treasury documents released after the Budget, the changes will raise around £300m in tax proceeds.