#AAYP 2014: Could new LLP tax rules impede careers?

WHEN THE GOVERNMENT first proposed the still-nascent LLP taxation rules, it presumably did not envisage the possibility of removing a frequently-used stepping stone in the careers of many in professional services.

But, nonetheless, legislation aimed at preventing tax discrepancies occurring among Lincolnshire’s strawberry pickers and their seasonal luminaries was brought in with – as far as the Treasury was concerned – the happy coincidence of affecting accountancy and law firms across the country.

The result is salaried partners now have to either be treated as employees, replete with National Insurance Contributions, the other alternative being satisfying one or more of three conditions set out by HMRC. The first option is ensuring at least a quarter of their pay is profit-dependent; the second option is to prove they have significant influence on the overall partnership; the third – and most common – would see them contribute at least 25% of their ‘fixed pay’ to the firm’s capital.

And so, salaried partners up and down the land have had to approach their banks for loans for capital contributions to their firms – something that, presumably they would not have naturally done in the normal course of things.

There is, of course, no empirical evidence as yet for what impact, if any, the measures will have on the progress of talent into partnership, but there are those across the industry who harbour reservations.

The biggest consideration for young professionals, perhaps those as ambitious and talented as those named in Accountancy Age‘s 35 Under 35, is that it is “conceptually bearing greater risk for the same amount of reward”, says Jane Howard, partner at law firm Wragge & Co. “What the rules should mean, though, is greater numbers of full equity partners.”

Training ground

On concerns that the ‘training ground’ of salaried partnerships provided would vanish, Howard is not convinced. “It won’t disappear, but it will cost more and they’ll be paid less as they’ll be paying NICs at 13.8%. Ultimately, young professionals may have to wait a little longer for full partnership – their career path will be elongated.”

The greater risk is something acknowledged by Menzies tax partner Simon Massey, but according to him, the extra commitment provides greater ties than the comfort zone salaried partnership can conceivably become.

“Prospective partners will have to think long and hard about putting in capital, but that shows commitment on the part of the new partner,” says Massey. “It just accelerates their financial commitment to the firm, but where there’s no pain, there’s no gain. It’s helpful to have had to think in more depth.”

That commitment may be an impediment for some, particularly in the context of their personal finance situation. Young talent, who may have a mortgage and a young family, could be perturbed by the prospect of borrowing further, notes Crowe Clark Whitehill’s London managing partner Nigel Bostock.

“Some can plateau at salaried partner level and are only half-committed, and so putting in capital is a natural progression,” he says. “It could cause reluctance in some individual candidates over the financial implications, but risking capital shows commitment. The conveyor belt of talent should be unaffected.”

And that may no bad thing, as while for some the salaried partner system could allow for a useful training ground for candidates for full equity status, it also provided a useful place for firms to “park” people.

In particular, the position can become a repository for lateral hires, women, niche specialists and “people you’re unsure of”, says Cass Business School’s professor Laura Empson.

Second-class partners

In boom times, many were made salaried partner but went nowhere – a disproportionate number, Empson explains. “Often people end up stranded and the pool stagnates. You’re left with disenfranchised people who can feel like second-class partners who haven’t really joined the club. For the firm, it can be good, but that’s why it’s exploitative.”

Indeed, that repository can grow insidiously unless closely monitored, and as such the change is welcomed. One alternative Empson puts forward is the introduction of “lock-step” remuneration, whereby share of profits increases in line with how long partners have spent with their firm.

For young talent coming through, adaptation is key. In particular, the ability to sell, above all else, is likely to be most highly prized – “You have to be able to feed yourself and others,” Empson says.

As far as their ability to do that is concerned, there is very little doubt on the part of stakeholders that the higher hurdle will be met.

Indeed, once the initial pain for firms in making the switch to the new regime and changing the way in which partners caught out by it has passed, the system will become the norm, and talent will largely be driven by the same motivations as before.

“It might slow some down by a year or so, but no more,” explains Simon Massey. “Most of the pain is happening at the moment as firms adjust, but those coming up need not be worried.”

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