In the 2013 Budget, the Government announced that HMRC would consult on changes to two aspects of the taxation of partnerships in order to address what it considered to be tax avoidance involving:
1 The disguising of employment relationships through LLPs; and
2 The manipulation of profit and loss allocations between members of partnerships which were designed to achieve a tax advantage.
The consultation is not intent on impacting traditional partnership structures which are operating the way legislation intended. The wording of the consultation document however suggests there could be a significant impact on many professional partnerships and LLPs.
Key point: employment status of salaried partners
There is a current automatic presumption that LLP members are self-employed. The same does not apply for partnerships, where the normal employment vs self-employment tests apply.
Proposals are in place to remove the presumption of self-employment which will require LLPs to consider whether members should in fact be treated as employees and therefore subject to income tax and employees’ National Insurance Contributions under PAYE.
If members are employees rather than self-employed, the LLP will also be liable for employer’s National Insurance Contributions including on benefits in kind provided to the member. The net result will be an increased cost to the individual partner and the LLP as well as implications for the firm’s cash flows, especially if it relies on tax reserves for working capital requirements.
HMRC say that the proposed measures are not intended to impact on the status of persons taken on as members at an appropriate point in their career in recognition of their professional knowledge and personal skills, even though as junior partners they may be rewarded substantially by a fixed profit share. However, members looking to retain their self-employed status may need to take a significant economic risk in the event that the LLP makes a loss or is wound up and should have other rights, such as a variable profit share and an entitlement to a share of any surplus assets on a winding up.
Key point: partnerships or LLP’s with corporate members
The other key aspect of the proposed changes relates to partnerships or LLP’s with both individual and corporate members. Measures are proposed which will seek to charge income tax and NIC on profits allocated to corporate members in which the individual members have an interest or can benefit from.
The HMRC consultation concludes on the 9th of August with final measures expected in the Autumn Statement. We can help yo undertake a strategic review of your existing partnership structure.
If you would like advice or more details please contact Jane Parry on 01254 60 4329 or email firstname.lastname@example.org