The Gary Lineker tax case proves partnerships are in IR35's crosshairs, but beware MSC liabilities, too

While Gary Lineker’s ‘win’ against HMRC did nothing to help PSCs to better understand the Intermediaries’ legislation (IR35), it did highlight the fact that it affects all types of intermediary, writes former tax inspector Carolyn Walsh.

General or LLP? Either way, limited HMRC interest, surely

Generally, members of an LLP partnership – unlike Mr Lineker who used a general partnership -- will be salaried, meaning their share of the profits are subject to deduction under PAYE regulations. So IR35 may apply but any liability will normally have been met.

With a general partnership (a la Lineker), a tax return is prepared each year with the profits allocated to the partners, who include their profit in their personal tax return and pay tax and NI on it accordingly.

It appears, then, that under normal circumstances, HMRC would be unlikely to show much interest in partnerships; general or LLP, due to there being little to gain from an investigation.

No room for complacency

However, contractors can’t be complacent. When IR35 reform was introduced in the public sector on April 6th 2017, and then extended to the private sector on April 6th 2021, general partnership arrangements were touted by some dark corners of the contractor industry as an ‘avoid IR35’ solution. That touting, I can tell you, isn’t lost on my old employer.

Even today, contractors ought to be aware that this type of provider masquerades as an accountancy firm. Their marketing looks reasonable enough to the lay person, but partnerships do still need to consider IR35 (as a pleased-with-itself Revenue pointed out following the judgment in favour of Lineker), that is; unless these partnership falls within the scope of the Managed Service Company legislation. The qualifier here is found at 61B of the MSC legislation -- Chapter 9 ITEPA -- specifying “company” to mean a body corporate or partnership.

Managed Service Company legislation takes precedence

So as if a potential IR35 risk isn’t enough with certain types of partnership arrangements, with these other types of partnership, the MSC legislation takes precedence, and it becomes a greater and more difficult tax risk to wriggle out of, given that the circumstances which almost match the qualifying criteria are present.

Necessarily for the purposes of this article, put very simply, the main indicators of there being an MSC risk in this instance, are:

1. Glossy and heavily-marketed arrangements that promote a ‘beat the taxman’ scheme -- in this case IR35 legislation.

2. The involvement of a provider, who facilitates and promotes such arrangements leading to:

3. The way in which payments (to partnership members) are made, would result in the individual receiving payments of an amount (net of tax and national insurance) exceeding that which would be received (net of tax and national insurance) if every payment in respect of the services were employment income of the individual. (N.B. This is direct quote from the MSC legislation, under ‘meaning of managed service company.’

What the taxman is seeing in his investigations

Where it gets worse is, in normal practice, a partnership offsets the running costs of the partnership before distributing the profits to its members. But the providers that HMRC is currently investigating, use an abusive arrangement which allows partnership members to offset personal expenses against the income paid from the partnership, i.e. before tax and NI is calculated and deducted.

Usually, these expenses are not commensurate with receipted expenses, nor in some cases are they allowable expenses -- for example, an exaggerated mileage allowance, where no travel from home to workplace was actually allowable for tax relief, is commonly used.

In summary...

To summarise, anyone who has been, or is being, paid via a partnership, must consider whether IR35 applies and take the legislation into account when completing their personal tax return. And hopefully, more people making that consideration will be the upside of the Lineker case.

But if the partnership was promoted to you as a way to avoid complying with the reformed IR35 legislation of April 6th 2017 or 2021, you should instead consider whether MSC legislation applies. Because HMRC absolutely will!

Lastly, if you are aware that the income drawn from the partnership is or has been treated under an ‘expense policy’ which is unrepresentative of the facts or clearly abuses tax rules, then you must be aware that a Targeted Anti Avoidance Rule may be used against you to drum up an HMRC bill with your name on it. If that’s you potentially, you should seek immediate advice on how to mitigate exposure to a tax demand, but hopefully, it won’t be a demand in the Lineker-esque liability stakes.


Profile picture for user Carolyn Walsh

Written by Carolyn Walsh

With over twenty years’ experience in the sector, Carolyn assists freelancers, contractors, agency and umbrella company workers, interpreting tax legislation and guidance with a no-nonsense approach.
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