HMRC scrapped a controversial tax crackdown that could have imposed significant retrospective liabilities on private equity and professional services firms. 

Last year, the UK tax authority changed its guidance on how members of limited liability partnerships (LLPs) are taxed, sparking investigations and backdated tax claims.

After strong industry lobbying, HMRC confirmed it would reverse its stance. The decision follows backlash from the 2024 autumn Budget and comes as the UK government works to repair relations with businesses. Professional bodies, including the British Private Equity & Venture Capital Association (BVCA) and the Chartered Institute of Taxation (CIOT), welcomed the move.

The dispute arose from tax rules introduced in 2014 that determine whether LLP members should be classified as self-employed or employees. If deemed employees, firms must pay National Insurance contributions of 13.8%, set to rise to 15% in April. One key rule, “condition C,” requires LLP members to contribute at least 25% of their profit share as capital to maintain self-employed status. HMRC’s 2024 guidance suggested that making large capital contributions to meet this threshold could be considered tax avoidance.

The BVCA argued that HMRC changed its interpretation without consultation and risked applying it retroactively. Jitendra Patel, tax principal at BDO, noted that firms had relied on previous HMRC assurances that such contributions were compliant. Many businesses had already spent time and resources preparing to defend their positions.

Following a review and discussions with industry representatives, HMRC clarified that the anti-avoidance rule does not apply if capital contributions are genuine, intended to be enduring, and involve real risk. CIOT technical officer Christopher Thorpe welcomed the decision, emphasizing that HMRC’s earlier stance unfairly equated legitimate commercial investments with tax avoidance schemes.