Partnerships...
a kaleidoscope of change? Kindly provided by The A9 Partnership
HMRC issued a consultation document ‘Partnerships: A review of two aspects of the tax rules’ earlier this year. We are waiting for possibly draft legislation at some point in Finance bill 2014.
This article outlines the
potential scope of these changes and how these might aff ect you.
Salaried members of LLPs An LLP (limited liability partnership) is an alternative corporate business vehicle that gives the benefi ts of limited liability but allows its members the fl exibility of organising their internal structure as a traditional partnership. The LLP is a separate legal entity with liability for the full extent of its assets but which accords its members the benefi t of limited liability. However, for tax purposes, the LLP is usually taxed as though it were an ordinary partnership with its individual members taxed on their profi t share on a self employed basis.
Individual members are taxed as a self employed member even if their role in the LLP would ordinarily mean that they would be regarded as being in an employer-employee relationship. They may, for example, bear no risk within the LLP and enjoy a fi xed salary which they are guaranteed to resolve, HMRC are concerned this results in an individual member
receiving a more favourable
treatment in respect of their income tax and National Insurance Contributions (NIC) position compared to an employee of the LLP (or any other business) on similar terms.
From 6th April 2014 the proposals will prevent members of an LLP benefi tting from the default position of self employment status if the reality is that their terms of engagement amount to an employee-employer relationship. As a result, the salaried member will be liable to both PAYE and employee Class 1 NIC. Additionally, the LLP will have to pay employer NIC at 13.8%. These rules will apply where specifi c conditions apply.
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Profi t & loss allocation schemes – all partnerships The principal arrangements under the microscope are where partnership with mixed members or partners, ie. individuals and companies arrange the allocation of profi ts and losses in such a way that a tax advantage is obtained. Typically this means the allocation of sometimes substantial profi ts to corporate members that will pay a lower rate of tax rather than to an individual member. A corporate member may pay a 20% rate of corporation tax whereas an individual member may have an income tax rate of 40% or 45%.
Alternatively, where losses are incurred the arrangements are such that the losses are allocated to the individual member who will obtain relief at a higher rate of tax!
There may, of course, be sound commercial reasons for having a company as a member of the partnership. However, HMRC has seen an increasing number of such arrangements where it considers profi t sharing ratios are artifi cial.
The proposed changes to the rules are intended to deter arrangements that exploit the tax treatment of mixed member partnerships.
Subject to specifi c conditions
being met, HMRC would be able to counteract the arrangements and allocate all or part of the profi ts that have been allocated to the corporate member to individual members with a restriction in tax relief in the case of losses.
The consultation document states that these rules would apply with eff ect from 6th April 2014 in relation to profi ts and losses that arise on or after that date. As you can see these are fundamental proposal which could impact on you. We will keep you informed on any developments in this area and how they may aff ect you.
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the.wire@btinternet.com
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