Peers debate potential LLP NI changes after reports of a possible budget proposal
Peers in the House of Lords have expressed sharply differing views on the possibility of making limited liability partnerships pay employer-style National Insurance contributions. The suggestion, which appeared in media reports as a potential Budget measure, has prompted extensive discussion in the professional services sector and prompted questions in Parliament last week.
The proposal drew swift opposition from several industry bodies after it was first reported, including the Law Society, the City of London Law Society and the Association of Partnership Practitioners. According to the Financial Times, Chancellor Rachel Reeves has since moved away from the idea following Treasury modelling which suggested that implementing the measure could lead to higher costs than benefits as a result of tax avoidance behaviours.
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Raising the issue during a House of Lords session, Baroness Neville-Rolfe, the Conservative shadow Treasury minister, asked what assessment the government had made of the impact of introducing employer-style National Insurance for LLPs. She referred to the contribution of professional services to the economy, noting that they account for around 12% of GDP and that most major UK accountancy and law firms are structured as LLPs. She asked whether ministers had examined the potential for unintended consequences, such as increased incorporation or outsourcing, which could have the effect of reducing, rather than increasing, overall tax revenues.
Responding for the government, Lord Livermore, the financial secretary to the Treasury, said he would not comment on individual tax measures ahead of the Budget. He described much of the pre-Budget speculation as irresponsible and said the government would follow its usual procedures.
Cross-bench peer Lord Carlile commented that many partners within LLPs do not, in reality, have the autonomy typically associated with self-employment. He argued that, where people are effectively in the position of employees, it would be logical for the tax system to treat them consistently with employment status.
However, Baroness Bowles of Berkhamsted, speaking for the Liberal Democrats, offered support for the self-employed sector, describing those within it as “risk absorbers” who do not have access to several state benefits. She questioned whether the suggestion regarding LLPs might represent the beginning of a broader move towards attaching additional tax burdens to self-employment. Baroness Bowles also raised the point that LLP status transfers risk from partners to wider society at no direct cost to the partners and suggested that, if there were a moral case for compensation for that risk transfer, it should be addressed directly rather than through National Insurance measures.
Labour peer Lord Sikka took a different view, stating that decisions to trade through companies or partnerships are personal choices, but that such choices should not be incentivised by the National Insurance system. He argued that it was wrong to offer incentives to what he described as “rich accountants and lawyers” that allowed them to avoid employer National Insurance contributions by trading as partnerships. He added that the differential treatment encourages abuse and avoidance strategies.
Cross-bencher Lord Pannick KC noted the economic significance of the legal services industry, including export revenues of £9.5bn in the previous year. He warned that an increased tax burden on law firms could adversely affect their ability to attract international arbitration and dispute resolution work, particularly in competition with jurisdictions such as Singapore and Dubai.
Conservative peer Lord Johnson also defended the LLP model, stating that it was not a tax “loophole” but an opportunity for professionals to come together. He said partners in LLPs were effectively being taxed on employing themselves and argued against characterising the structure as a means of avoiding obligations.
The debate highlighted the breadth of opinion within the Lords and the degree of uncertainty surrounding the proposal. The government has not commented on whether the measure will appear in the forthcoming Budget, and peers remain divided about its potential impact.