The controversial debate over taxation of limited liability partnerships (LLPs) has reached a decisive stage as changes are scheduled to press ahead on 6 April, while individuals have been allocated more time to contribute capital, HM Revenue & Customs (HMRC) announced late last Friday (21 February).
Having long been accused of unfairly treating all partnerships as tax avoidance vehicles, the Government has been taking meaningful steps to reset the relationship as it has ‘become evident that many LLPs have members who are engaged on terms similar to those of employees rather than traditional partners’, according to guidance notes published by HMRC last week.
In response to comments received from the legal profession on draft legislation and guidance on salaried member rules in December, the guidance note said it will amend the legislation to make it ‘explicit’ that the new rules apply where it is ‘reasonable to expect that at least 80% of the amounts payable by the LLP for members’ services will be disguised salary’.
An LLP member must satisfy three tests to be treated as an employee for tax purposes: they receive a ‘disguised salary’ ; they don’t have ‘significant influence’ over the partnership’s affairs (ie those that merely work in the business rather than carry it on); or their capital contribution to the LLP is less than 25% of the disguised salary.
HMRC defines ‘disguised salary’ as either an amount that is fixed; or variable but varied without reference to the overall amount of the profits or losses of the LLP; or is not, in practice, affected by the overall profits or losses of the LLP.
Overall, HMRC referred to the test as a ‘prospective one’, and ‘provided that [it is] applied reasonably, the test is not revisited with the benefit of hindsight if it is found that any of the assumptions were incorrect’.
HMRC further added that for individuals who are members, any commitment in place by 6 April 2014 to contribute capital within three months will be taken into account in determining whether the capital contribution condition is met. Also, where an individual becomes a member on or after 6 April, a two-month period will be allowed to provide the capital, again subject to a firm commitment to contribute the capital from the day of becoming a member.
On the latest guidance, Baker Tilly’s chair of professional practices group George Tilly said: ‘The revised guidance notes represent a modest step in the right direction. However, there is now no doubt that the new rules will take force from 6 April 2014: this is the time to assess how firms will be impacted specifically and what steps should be taken in the light of that knowledge.’
Meanwhile, Stuart Hatcher, partner at PwC Legal, said: ‘The rules have been clarified to some degree, with some helpful examples. It should be easier for true partners to keep their self employed status.
‘Partnerships now need to get moving and assess how they might be affected. Many firms had been waiting for the revised rules, and there’s now just six weeks until the new regime is in place.’
sarah.downey@legalease.co.uk