Press Room

8 Feb 2024

Why HMRC treats Jersey LLPs differently from US ones – Andrew Parkes

National Technical Director, Andrew Parkes, discusses HMRC’s updated guidance on overseas entities and US LLCs, how this has changed, and its implications, in Taxation.

Andrew’s article was published in Taxation, 5 February 2024.

Why do HMRC treat a Jersey Limited Liability Partnership differently to a US one?

HMRC answer that question in their International Manual and the relevant guidance was greatly expanded just before Christmas, including throwing down a gauntlet to US Limited Liability Companies.

What has changed?

HMRC now go into more detail as to what the guidance is considering when it talks about entity classification and also importantly, what it is not. The guidance confirms that the classification is about whether the owner/member is taxed upon the income or gains of the entity (transparent) or whether they are taxed on distributions from the entity (opaque). The guidance is not about whether the entity is a partnership, company, trust, etc.

The guidance still lists the six criteria from Memec plc v CIR (70 TC 77) that need to be considered, but now provides an example as to why all of the conditions need to be considered and it is not, as the First Tier Tribunal seemed to suggest in Anson v HMRC [2015] UKSC 44, that whether the members are entitled to share in the profits as they arise or not, is the only question that really matters.

Helpfully, the guidance still contains the list of entities where HMRC have already given their view, so you can still get a quick view as to how HMRC are likely to view an entity, and this then leads on to one of the major changes.

HMRC have an almost paranoid fear that their guidance will be used for nefarious purposes and like to keep their options open as to whether it can be relied upon. This is possibly why the expanded guidance includes a detailed page setting out when HMRC may not go along with the decision published in the preceding page. The new page also sets out at length how HMRC will approach providing a definitive view for a particular entity, and also seems to tee up the final substantial new page (the final new page is just the contact details for clearances, which have been moved).

This final page is what people have perhaps been waiting for, or maybe dreading is the right word. After the Supreme Court upheld the First Tier Tribunal’s decision in Anson that double taxation relief was available, HMRC effectively fudged the issue by ignoring it, but allowing people to discuss the classification on a case-by-case basis. However, now they have ended the fudge and come out swinging. HMRC are effectively saying that they consider the First Tier decision in Anson to be wrong. They then go on to say that they will seek to challenge anyone who has filed on the basis that it is correct.

What does this mean for me?

For the majority of people, the new guidance will be of only passing interest. Even to those who may use non-UK entities in their structures, it will have limited application. This is because for the vast majority of entities in the vast majority of cases, the treatment for UK tax purposes is uncontentious and well known. You can continue to invest in a German GmbH or use a French SA and know that you will not be taxed on its underlying profits as they arise.

However, where a country comes up with a new entity, or you are moving into lesser-known areas of the world, knowing how HMRC will approach considering whether the entity will block your profits from immediate UK taxation is to be welcomed.

All of this though brings us to the elephant in the entity classification room, that of US Limited Liability Companies. HMRC have never been happy with the “Anson” case, not because they lost (although that did rankle), but because of the much wider problems it caused. The decision was a win for Mr Anson as he received double taxation relief, but for UK Plc, it was a bit of a disaster. Although it was fact dependent (which is what HMRC are relying upon now) the decision could have had much wider application. Specifically, it could have disrupted a lot of UK groups with US LLCs. If the Anson decision applied to those LLCs, their profits could now be immediately assessable in the UK. Oops.

This led to the fudge mentioned above where HMRC said they would continue to treat LLCs as opaque, resulting in their profits staying out of the UK. However, and again keeping options open, HMRC said they would consider other LLCs on a case-by-case basis – in other words, allowing them to ignore small and/or inoffensive structures, but reserving the right to challenge if and when they wanted.

That time has now come. With the new guidance, HMRC have said that they will now challenge LLCs that are said to be transparent, and indeed look to assess anyone that used the Anson decision.

This article is not the time or place to debate whether HMRC’s view is sustainable, but it is the place to warn anyone who has an LLC that they have been treating as transparent on the back of Anson that HMRC are looking to knock on your door. Therefore, now might be the time to refresh your thinking to make sure you are happy to take HMRC on, accept HMRC’s new position or look to see if there is a way to keep your LLC/structure transparent.

Andrew Parkes

Andrew is a highly experienced international tax specialist who worked at a senior level in HMRC’s international teams for over 10 years. He has a wealth of experience and technical knowledge.

Email: Andrew Parkes