LLP Tax Changes - Review Your Partnership Agreement Now

The tax assessment of LLP’s and mixed member partnerships will almost certainly change on 6th April 2014.  Technical consultation on the Finance Bill 2014 has now closed and HMRC should publish its revised guidance imminently.  However the draft legislation is expected to go ahead in substantially its current form. 

The cumulative effect of these changes will mean that some partners could face a large increase in their tax bill.  As a result many firms will look to mitigate the impact of these changes by reviewing their partnership structure.  

Two strands of change to partnership taxation

The main objective of the reforms is the removal of perceived structural inconsistencies in the tax system.  This will be achieved by making changes to two distinct aspects of current partnership tax rules:- 

• Removing the presumption of self-employment for salaried members of an LLP in order totackle what HMRC views as “disguised employment”; and
• Introducing new rules to apply to mixed membership partnerships (not just LLP’s).

Disguised Employment

Currently, individual members of an LLP are always taxed on a self-employed basis irrespective of the terms.  

Under the proposed changes, LLP members will have to satisfy at least one of the three following conditions to prove they are true partners in the business:-

• A variable profit share based on the overall profits of the firm;
•   Significant influence over the affairs of the firm; or
•  A contribution of at least 25% of their fixed pay is made to the firm’s capital.

There remains some uncertainty about how exactly these conditions will be applied but the basic principles will probably remain.  There is also some doubt about the timing of the implementation of the changes, particularly given that so many LLPs still follow the traditional partnership year end of 30^th April. 

Mixed membership partnerships and asset disposals

There are a number of structures used by partnerships that involve using corporate partners for various reasons.  

The Government now aims to prevent partnerships from using corporate partners to reduce the tax liabilities of individual members.  Partnerships may however still continue to use a corporate member for non-tax purposes. 

It is not intended for there to be any exemptions for particular partnerships, for example, family partnerships.

What to do next?

It is important to review your existing partnership structure with a view to making any necessary changes in order to keep your structure in line with these changes and therefore, mitigate any unnecessary additional tax liabilities taking effect from 6^th April 2014.

Tolhurst Fisher acts for a number of professional partnerships and can assist you in reviewing and your existing agreements and amending as necessary.  Please contact our commercial department by emailing commercial@tolhurstfisher.com for further information.