Top 50+50 LLPs make cash call due to tax changes

A SIGNIFICANT NUMBER of firms in Accountancy Age‘s 2014 Top 50+50 made cash calls to partners caught by the tightening of LLP tax legislation.

Of the 49 LLPs within the latest Top 50+50 survey, 34 said they were in some way affected by the tightened rules, with 21 admitting they were forced to make cash calls to the partners caught by the new legislation.

In all, firms confirmed to Accountancy Age at least £3.8m was paid in cash injections, although the true number is likely to be far higher. The 2014 Top 50+50 survey of UK firms will be released on Wednesday 23 July.

The rules around LLPs were tightened, making it more onerous for partners to retain their status. A three-point check was introduced, taking effect from April, which, if partners fail to meet, sees them taxed as an employee.

The government harboured concerns that limited liability partnership structures allowed “disguised employment” to take place, whereby people that are ostensibly partners in fact have a guaranteed income and little decision-making power.

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.

The preference for the latter option led to banks struggling to provide the necessary loans in time for the commencement of the legislation, leading to extensions put in place provided evidence of the commitment could be produced.

KATO Consulting director Phil Shohet said the numbers illustrate the amount of upheaval firms underwent as a result of the law change.

He said: “It causes a massive constitutional and commercial problem for firms. Salaried partner is a stepping stone and provides flexibility to both the firm and the partner.

“A lot of them are, in effect, managers and are provided status by the term ‘partner’. Often, they won’t make equity either because their firm doesn’t believe they’re ready yet or the partner doesn’t feel prepared. Now they are put in a position where they have to make a decision when they don’t want to.

“Firms now have to ask whether they are justifying their existence as partners.”


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  • John Drover

    Why does HMRC consider that a person contributing at least 25% of their ‘fixed pay’ to an LLP’s capital is sufficient to make them a partner?

    The equity partners of an LLP are required to carry on business in common with a view to profit. They must also be entitled to participate in a discretionary sharing of those profits and share the losses or be entitled to a sharing of the LLP’s assets on a winding up.

    A distinction must be drawn between remuneration that an individual can claim directly from an LLP without the need for a resolution to divide profits and prior claims to a profit share (which may be of fixed amount or termed ‘salary’) but which nevertheless require a resolution to divide profits.

    To the extent that a member has a contractual entitlement to remuneration (which may be fixed or profit-dependent), that can be enforced personally against the LLP without the need for agreement by the other members, the member is a salaried member. To the extent that a member is entitled to remuneration only after a decision by the collective membership to divide profits, he is an equity member.

    Care must be taken where what might appear to be “members’ capital” is in fact puttable by each member, for example on retirement. In this instance, members funds are debt instruments because repayment cannot be avoided. The annual divisions of profit in these circumstances are in fact a return to debt holders and should be treated as expenses, not appropriations of profit.