There are many reasons why a business might operate as an LLP, rather than as a company. Some assume (unfairly) that the primary motivation is the absence of employers' (that is, secondary Class 1) National Insurance contributions (NICs) on profit shares and drawings. This cost is relevant, but is only likely to be one factor in the decision. But it would not be surprising if preserving National Insurance revenue is a driving force behind the consultation's first proposal.

This is to create a class of "salaried member", who will no longer be taxed as self-employed. Instead, such members will be taxed as employees, with the LLP operating PAYE and paying employers' NICs on its return in the same way as for the LLP's actual employees. It is debateable whether now is the right time to impose further absolute and cash flow burdens on businesses.

Two types of member are the target: low paid workers who would normally be regarded as employees and who are being taken on as LLP members as a condition for their obtaining work; and those in high-salaried professional areas such as the legal and financial sector. Despite the professed concern for the former's loss of protections associated with employment, the proposal is only to tax both groups as employees. This is achieved by categorising an individual as a "salaried member" in the following two situations, either of which results in the loss of self-employment status:

The application of this "significance" test is the key to how widely the net of salaried members will be cast. While HMRC's view is that a profit share is unlikely to be significant if it never exceeds 5% of any fixed entitlement, this proposal raises many questions, and it is not clear how it will apply to the more sophisticated partnership structures (both within and outside the professions).

A TAAR (targeted anti-avoidance rule) will be included for both tests, so that a share of profits over a threshold (which is so high that it is unlikely to ever be exceeded) will not automatically prevent that member being taxed as an employee.

However, what if performance is such that no variable amount is actually paid, even though there was a realistic potential to do so? What if this occurs for several years? The concern is that such issues will be left to HMRC guidance and unpublished practice.

The remaining proposals (which are not limited to LLPs) address three issues:

Such forms of tax planning are a response to the differential between, on the one hand, rates of personal income taxation and, on the other, rates of capital gains tax and corporation tax. It cannot be a surprise that individuals who pay tax on trading income at twice the rate of companies will, particularly when capital gains are also taxed at lower rates, allow profits to be allocated to corporate members. This is especially so for profits that are retained in the business, either to fund working capital or as part of arrangements to defer vesting of awards.

HMRC is justified in acting against aggressive schemes, where individual members access the corporate member's profits in a tax-free form. The concern is that HMRC's proposed response is very wide and catches more legitimate arrangements, possibly including those that replicate share incentives which are commonplace in the context of corporate vehicles.

Unfortunately, this seems to be intentional. The consultation acknowledges that profit deferral is used as part of arrangements that subject awards to executives to forfeiture, depending on performance during a deferral period. Although the aim of such arrangements is the legitimate one of aligning incentives with long-term performance, HMRC's view is that partners should not obtain tax rate and timing benefits without bearing the full tax consequences that arise from being an employee of a company.

Accordingly, HMRC proposes that individual members be taxed on a corporate member's profits whenever there is such an "economic connection" between the individual and the corporate member that the individual might benefit from the corporate member's profits. This includes merely being a shareholder in the corporate member. If implemented, partnership agreements might require amendment to provide compensation to individuals for being taxed on profits that are received by others.

HMRC dismisses the concern that the clamp down on profit deferral arrangements mean that profits are taxed before members are able to access them. Apparently, such mismatches are a consequence of being a partnership and a cost of the other (beneficial) aspects of partnership taxation. Responding to arguments that deferring rewards links them to long-term performance, HMRC offers the possibility of an unspecified form of retrospective tax relief if the award does not vest. This is more than HMRC accepts is currently available for employees.

The proposal to counter loss allocation schemes is more draconian: the losses are disallowed, rather than reallocated. Again, the threshold for this is low: it only need be "reasonable to assume" that a main purpose of arrangements in force for a period of account is to allocate a partnership loss to a partner with a view to that partner obtaining a reduction in tax liability by way of income tax reliefs or capital gains reliefs.

In profit transfer arrangements, a person joins a partnership, becoming entitled to a share of its profits. This incoming member is subject to less tax than existing members, who are paid for giving up the partnership share. This payment is not taxed as heavily as the partnership profits would have been. Instead of using targeted anti-avoidance legislation, HMRC proposes taxing the payment by the incoming partner as if it were partnership income of the other partners if there is a "profit transfer arrangement", and it is reasonable to assume that a main purpose of that arrangement is to secure a tax advantage.

Most, if not all, of these proposals seem likely to be implemented (scheduled for 6 April 2014, without any grandfathering for arrangements in place before then), although there will probably be intense debate over their scope. Until there is more clarity as to their application to arrangements that achieve legitimate commercial objectives, it seems premature for partnerships to draw firm conclusions as to whether any restructuring is appropriate.

A review of two aspects of the tax rules on partnerships; comments are required by 9 August 2013.