[Update – 31st March] On the 27th March, the Finance Bill 2014 was published. There is a seperate document that deals with salaried memebrs of LLPs and it is available here.

This story is of interest to all LLPs and particularly to professional firms such as accountants and lawyers.

This week, the Law Society Gazette reported, here, that a proposed crackdown on tax avoidance by limited liability partnerships will increase systemic risk to the financial sector, a debate organised by City firms has heard. But a high-profile Conservative former minister warned opponents of the new measures that they will need to come up with hard evidence urgently if they are to sway ministers. John Redwood was summing up a debate organised by the New City Initiative, an alliance of asset management firms, on new measures to be introduced in April to tackle ‘disguised employment’ among members of LLPs.

The new rules will tax members of LLPs as if they were employees unless they can demonstrate that they have a financial stake in the partnership, are rewarded according to profits and play an active part in its management.

The Gazette article quotes Martin Shah, tax partner at City firm Simmons & Simmons, who said the measures were already having an impact on law firms. ‘We are very concerned with the proposals,’ he said. ‘If they are promulgated in the form set out it will lead to decisions being made for tax reasons rather than commercial reasons. We also have significant concerns about the timing.’

Dominic Johnson, deputy chair of the New City Initiative, said that the changes might discourage investment in the City, and encourage businesses to choose limited company rather than partnership status, which he said would increase systemic risk.   ‘If you meddle with the structure of LLPs you increase risk.’

However Redwood said that ‘the view from SW1’ is that tax avoidance is automatically a bad thing. ‘You are not going to win this argument unless you help me engage in the general argument, which is that you need a concept of good and bad avoidance.’ He said the only way Westminster would become interested in the LLP issue would be if there was firm evidence that partnerships would move elsewhere. ‘You need to put evidence that this is going to be the case, quickly,’ he said.

The effects of the planned changes to the taxation of LLPs will be “far harsher than originally expected” and could put a significant strain on finances come April, solicitors have been warned, according to an article in legal futures, here.  Accountants Baker Tilly say it had urged HM Revenue & Customs (HMRC) to give law firms more time to increase partner capital contributions given the possible difficulties in financing them before 6 April.

Under the planned changes, a member of an LLP would be treated as an employee for tax purposes if they performed services for a fixed fee or a fee unrelated to profits, they did not have significant influence over the LLP’s affairs, and if the member’s contribution to the LLP was less than 25% of the disguised salary.

The HMRC consultation runs until 4 February, but George Bull, head of Baker Tilly’s professional practices group, said discussions with HMRC are “already revealing areas where the new rules may benefit from modest relaxations before they come into force from 6 April 2014. It’s also become clear that some effects of the new rules will be far harsher than originally expected”.

I recommend looking at the Baker Tilley website which says that, at its heart, the draft legislation is expected to go ahead in substantially its current form. LLPs with members who may be taxed as employees from 6 April 2014 are therefore actively [or should be] considering what scope there is to modify the firm’s financing, profit-sharing and governance arrangements with a view to ensuring that members continue to qualify as self-employed under at least one of the three following conditions:

  • Condition A – variable profit share
  • Condition B – voting
  • Condition C – capital contribution

HM Revenue & Customs is expected to publish final guidance on the new rules on 17 February.

Martin Pollins
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