The use of service companies by limited liability partnerships (LLPs) could be outlawed in the UK Government's latest clampdown on tax avoidance.

Danny Alexander, chief secretary to the treasury, confirmed the move at the Liberal Democrats' annual conference this week, saying: "We will be closing the loophole that allows partners in partnerships to structure their staff arrangements so that they avoid the correct amount of income tax. It's wrong, it's unfair, and it's got to stop."

The Treasury is currently engaged in a consultation on partnership tax, with draft legislation expected in the autumn ahead of the introduction of the new regime for the next financial year. Giles Murphy (pictured), head of professional practices at Smith & Williamson, said that it was likely that any changes to taxation of service companies would be included with that legislation.

The use of service companies by law firms and other professional services firms is widespread, with a typical structure seeing the service company engage employees to sell their services to the law firm LLP at a profit, thus transferring the profit earned away from the LLP and into the company, which is taxed at corporation rates rather than income tax rates.

Colin Ives, professional services partner at BDO, commented: "While the actual amounts of tax involved are not that great, it will affect most law firms as they tend to use service companies. It is a cost saving that they will miss when it is gone."

Murphy added: "The proposals as drafted would create a one-sided adjustment in favour of HMRC, whereby the service company would pay tax as before, but the partnership would not receive a deduction. All firms with service companies will therefore need to review the arrangements promptly."