HMRC to press on with LLP tax changes

PARTNERS AT LIMITED LIABILITY PARTNERSHIPS will have to comply with one of three tests in order to satisfy the tax authorities they should not be treated as employees, new guidance shows.

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.

The guidance shows that, despite widespread adviser disquiet over the breadth of firms that could be caught within the regime, officials are pressing ahead with its introduction.

Originally expected on 17 February, the guidance shows the legislation will be introduced in the Finance Bill 2014 when it receives Royal assent, likely to be by 6 April. The three-point test HMRC is set to be imposed in order to determine a staff member’s status.

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.

If partners are deemed to be employees, then employer’s national insurance contributions at 13.8% will be due and other employment-related tax rules, such as benefits in kind and share scheme rules, will apply to them.

Menzies tax partner Richard Godmon said: “Why they couldn’t delay implementation for 12 months so that professional firms had more time to reorganise, or even better simply change the offending tax legislation… so LLP partners are not deemed self-employed, but are tested by the normal rules, I do not know.

“These changes seem to encapsulate everything that is wrong with how we operate our tax system, something is initially poorly drafted and allows scope for tax avoidance, so then there is then more legislation to try and fix the problem.”

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