Major changes are being made to the taxation of partnerships and LLPs. If you have partners who are entitled only to a fixed profit share or if you have a mix of corporates and individuals as partners you are likely to need to take action now…
All partnerships and LLPs should be conducting a review of their structure in light of legislation due to take effect from 6 April 2014.
There are two main areas which HMRC are focusing on:
- The use of LLPs to disguise employment relationships; and
- The use of non-individual partners (e.g. Companies) resulting in a tax advantage
We will not know the exact detail until the legislation is published; however HMRC has issued draft provisions and detailed guidance which should be used now to kick start the review process.
1) The employment relationship disguise
HMRC has suggested that a partner in an LLP will be considered an employee from 6 April 2014 where:
- 80% or more of their remuneration is fixed;
- They have no significant influence in the running of the business as a whole; and
- A capital investment for a sum equivalent to at least 25% of their expected income into the LLP has not been made.
Existing partners will have 3 months from 6 April 2014 to bring their capital contribution into line and new joining partners will have 2 months.
HMRC clearance applications will be possible once the legislation is in place to seek confirmation where situations are unclear; which is a highly recommended option for more complex or informal partnership agreements.
2) Use of a corporate partner
Having a corporate partner has long allowed profits to be diverted as corporation tax is often lower than income tax. Furthermore, profits from a company can usually be extracted via dividend with a much lower tax liability than receiving an income profit share directly from a partnership.
This latest legislation may limit this type of planning.
Specifically, where a profit share is allocated to a non-individual member (e.g. a company) and as a result, an individual’s share is lower than it would have been then the new rules are likely to apply.
In particular, deferring profit shares and/or diverting them whilst still allowing the individual to ultimately benefit is what HMRC wants to stop. Careful attention will be required were partners are connected and connection can be quite far reaching.
The advice for both scenarios is to seek a review of your partnership as soon as possible.
The interest, penalties, professional fees and administrative burden for making the wrong assumptions could be considerable.