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New Tax Rules for Limited Liability Partnerships (LLPs) Come Into Play

Written by: Keith Tully

Published: 8th April 2014

New and controversial rules for Limited Liability Partnerships (LLPs) have come into effect this April, despite concerns from financial advisers.

The new legislation was announced in the annual Budget by Chancellor George Osborne following long-held concerns by the Treasury that LLP structures were open to tax discrepancies.

Both HMRC and the Treasury determined that ‘disguised employment’ was a pertinent issue, where people within an LLP firm who were ostensibly partners would, in fact, be receiving a guaranteed income with little influence over decision-making.

Under the new rulings, partners in Limited Liability Partnerships must meet one of three criteria in order to maintain their status:

  • Criteria 1: They must ensure at least a quarter of their pay is profit-dependent
  • Criteria 2: They must contribute at least a quarter of their ‘fixed pay' to the firm's capital
  • Criteria 3: They must prove they have significant influence on the overall partnership

If partners are proven to be employees, then employer's national insurance contributions at 13.8% will be owed amidst various other employment-related taxes, including benefits in kind and share schemes.

Finance and tax advisers have been outspoken in their criticism of the move, including Kevin Hindley, a managing director at Alvarez & Marsal Taxand, who warned that the "ill-thought through" rules would affect up to one in ten businesses across the UK.

"It is in contradiction to promises made by government at the time the LLP Act was introduced, and will create widespread uncertainty for many genuine partnerships," he said.

A major aspect of discontent stems from firms having only a short period of time to adjust to the new legislation with the plans only surfacing in January this year followed by guidance in February.

There is also the issue of partners from LLPs across numerous sectors who will now be considered employees; something likely to create awkwardness and see salaried partners approach banks in order to raise the capital required to satisfy the third criteria.

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."

*George Osborne image used in accordance with Wiki Commons Fair Use policy.

Keith Tully

Keith Tully

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Keith has been involved in Business Rescue since 1992, during which time he’s worked for both independent and national firms. His specialties include company restructuring matters and negotiating with HMRC on his clients behalf.

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