Proposed changes to the taxation of partnerships will affect firms' approach to succession planning, stakeholders tell Accountancy Age
THE ABILITY to cultivate and test out talent adequately for partner roles will be adversely affected by incoming Finance Bill legislation over the taxation of LLPs.
HMRC and the Treasury are concerned that limited liability partnership structures allow “disguised employment” to take place, whereby people who are ostensibly partners in fact have a guaranteed income and little decision-making power. The worry for the government is that the well-established arrangement gives rise to tax discrepancies.
However, firms are warning that by effectively removing the salaried partner roles, a “stepping-stone” to full partnership will disappear, leaving them more reticent to promote candidates into the roles, Accountancy Age has learned.
Under the draft proposals, partners must satisfy one of three tests in order to maintain their status. The first option is ensuring at least a quarter of their pay is profit-dependent; the second would see them contribute at least 25% of their ‘fixed pay’ to the firm’s capital; or the third option is to prove they have significant influence on the overall partnership.
“We have a number of executive partners, who are young and up-and-coming partners who are not ready for full equity, but it’s a good stepping-stone on the way to full equity,” said Menzies tax partner Richard Godmon. “It’s always been accepted that they’ll be treated as self-employed, so all these changes in the rules have made us have to restructure how we treat them.
“It’s quite unfair because professional firms were not the reason why the rules had to be changed, it was being abused by other people. I think some would probably play it safer [given the proposals] and wait and see before you move them up from, say, a director into an equity partner, when you might not have had that stepping-stone. A lot of younger partners might not be prepared to go onto the next stepping-stone if they need to put a significant amount of capital in. They might prefer to wait as an employee or director.”
The tests have been criticised by practitioners and other stakeholders, who note they are unreliable indicators of partnership. It may be unnecessary, for example, for a partner to put as much as 25% of their income into the partnership. The influence test, too, is currently over the company as a whole, something that many stakeholders suggest is unreasonable given the global nature of many of the businesses in question and the autonomy afforded to some areas of the businesses in question.
For many partnerships, the preferred route to circumvent the problem is to ask salaried partners to place more capital in the business, according to Fergus Payne, partner at law firm Lewis Silkin.
“The tests published in December were actually rather different to the ones published in May,” he said. “It catches more than originally anticipated. A good number of firms are trying to proceed with… sticking in some capital. It’s not an alien concept, they will most typically have borrowed it from a bank, so in theory it’s a relatively easy solution that you go an ask the bank to lend your partners some money.
“Anecdotally, I think some of the banks are struggling to cope with the administration and weight of applications, but they’re doing what they can and being helpful and co-operative.”
Payne added that moves have been made to relax the 6 April deadline for capital payments to be relaxed, providing a commitment has been made by partners, although any easement is unlikely to become apparent until 17 February when new guidance will be released.
The legislation will take effect from 6 April, when the Finance Bill 2014 comes into effect.