LLPs taxation rules come into force

CONTROVERSIAL taxation rules for limited liability partnerships have come into effect, despite grave concerns from advisers.

HMRC and the Treasury are concerned that LLP 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.

Despite widespread adviser disquiet over the breadth of firms that could be caught within the regime, officials have pressed ahead with its introduction.

Under the plans, 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.

A significant part of the issue firms have with the provisions is the short period of time they have had to adjust, with the plans only surfacing at the beginning of the year, followed by guidance in February.

Practitioners, however, hold that the measures are not truly aimed at professional services, rather other industries such as season agricultural workers employed through LLPs as a tax-saving measure.

Such practices, firms point out, could easily be targeted with much narrower legislation given that those organisations are self-evidently distinct from accountancy, law or wealth management firms.

There is also a sizable portion of partners from across the professions who will suddenly be considered employees; something likely to lead to awkward conversations and see salaried partners approach banks in order to raise the capital required to satisfy the third test.

That, firms maintain, could impede succession planning given the common use of salaried partner positions as a stepping-stone to full partnership as part of a two-tier system.

Despite calls by the House of Lords to delay the rules for a year, the changes took effect from 6 April.

Chairman of the CIoT’s employment taxes sub-committee Colin Ben-Nathan said: “When is a partner not a partner? In HMRC’s view it’s essentially when their salary doesn’t vary with profits, they don’t have significant influence over the partnership’s affairs and they don’t have a substantial financial stake in the firm.

“There has undoubtedly been some abuse of the current rules with, for example, cleaners and seasonal agricultural workers being made partners to avoid national insurance. So the government were right to review the taxation of LLP members in the interests of fairness in the tax system.

“However it is disappointing that the House of Lords recommendations have been ignored and this has been pushed through so quickly. The proposed changes are not the same as those originally consulted on last year and we think that firms should have been given more time to consider the legislation in its final form, to determine whether it applies to them, seek advice where there is doubt and to make appropriate changes.”