The House of Lords' economic affairs committee has recommended a delay to the government's imminent tax crackdown on limited liability partnerships (LLPs).
In its second report on the draft finance bill, published this week, the committee said the government should give "urgent consideration" to delaying provisions that enforce more stringent taxation of LLPs.
The Treasury has argued the LLP model enables managers to reduce tax on salaries and avoid income tax by disguising employees as self-employed partners. Legislation designed to counter these effects is due to come into force on 6 April.
But the economic affairs committee said the proposed legislation does not achieve the Treasury's goals in its current format.
"We recommend that the government give urgent consideration to delaying these provisions until next year," the committee said.
"Nearly all the evidence that we received supported the view that the proposed legislative tests to determine who is a partner for tax purposes do not achieve their policy objective."
Under the draft proposals, partners must satisfy one of three tests in order to maintain their status: ensuring at least a quarter of their pay is profit-dependent; contributing at least 25% of their ‘fixed pay' to the firm's capital; or proving they have significant influence on the overall partnership.
The committee warned: "there is too little time to settle all the outstanding issues, get the legislation right and enable businesses to adapt to that legislation in time for a 6 April start."
Chancellor George Osborne unveiled the clampdown in the Autumn Statement as part of measures designed to target tax avoidance.
The New City Initiative (NCI), which has been campaigning on behalf of LLPs, said this week's report endorses "many of [its] suggestions".
The NCI, whose members include Fundsmith and Killik & Co, has previously warned the legislation may cause LLPs to redomicile, and argued it may discourage new start-ups from using the structure.
"Delaying the implementation of this new law until April 2015, as the Lords' Select Committee has recommended as a minimum, would give LLPs greater time to implement what will inevitably be, for many, a radical and time-consuming structural adjustment," said the NCI.
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