UPDATE - LLP Tax Changes

This post is an update to our previous blog post which you can find here.

HMRC has now published its revised guidance on the new tax rules for salaried members of LLP’s. HMRC has refused calls to postpone or scrap these changes, but has made some small concessions. 

LLP members will have to satisfy at least one of the three following conditions to prove that they are a true partner in the business.  The revised guidance provides some clarity in the interpretation of each condition as follows:-

Condition A – Disguised Salary

A member must receive a variable profit share based on the overall performance of the firm.

HMRC will be looking for a reasonable expectation that at least 20% of a member’s reward for services will be a share of the overall profits of the firm. 

Condition B – Significant Influence

A member must have significance influence over the affairs of the firm.

HMRC provide examples of those who do have a significant influence including those involved with the management of the business as a whole or senior members who may have not have day to day management, but their role means that they can still exert significant influence.  There is no line in the sand as to the number of members which can exist consistent with all of them having significant influence, this will vary from firm to firm.

Condition C – Capital Contribution

A member must contribute at least 25% of their salary to the capital of the firm.

HMRC recognises that many firms will struggle to obtain loan finance by 6th April 2014.  In order to avoid a position where a member may be treated as an employee for a short period whilst they obtain finance in order to invest capital, HMRC is giving a three month grace period.  Provided that there is an unconditional commitment to make such a contribution by 6th April, and that contribution is then made within 3 months, this condition will be satisfied.

What to do next?

It is important to review your existing partnership structure with a view to making any necessary changes in order to keep your structure in line with these changes and therefore, mitigate any unnecessary additional tax liabilities taking effect from 6th April 2014.

Tolhurst Fisher acts for a number of professional partnerships and can assist you in reviewing and your existing agreements and amending as necessary.  Please contact our commercial team by emailing commercial@tolhurstfisher.com for further information.