Clients of London Registrars’ business consultant services may be interested to read that there have been recent changes to partnership taxation, following the closure of a consultation designed to tackle the perceived use of partnerships to avoid tax. The consultation, which was announced by the Chancellor in the 2013 Budget, culminated in the issuing of draft legislation in December 2013, with the resultant measures set for inclusion in the 2014 Finance Bill

There are new rules concerning limited liability partnerships (LLPs), for example, aimed at tackling ‘disguised employment’. No longer will it be automatically presumed that an LLP member is self-employed for tax purposes and instead a member will be treated as an employee for tax purposes, subject to the fulfilment of certain conditions. This will make them subject to PAYE and NICs.

There are three conditions that must all be met if an individual is to be treated as an employee for tax purposes:

  • more than 80 per cent of the member’s remuneration must be calculated other than by reference to profits, this being known as ‘disguised salary’
  • the member has no significant influence over the LLP’s affairs
  • the capital that the member introduces is less than 25 per cent of the disguised salary from the LLP in the year concerned

A revised technical note was released on 21 February 2014, after which HMRC gave clarification on the subject of the third condition, that legislation would be introduced to allow more time for both existing and new members to arrange the finance necessary for making their capital contributions. Existing partners will have a three month window from 6 April 2014 in which to make their capital contribution, as long as, by that date, no unconditional requirement has been put in place for the capital to be provided by that member.

Meanwhile, those becoming a member of the LLP on or after 6 April 2014 can make their capital contribution within two months from the date they became a member. Again, this depends on there being no unconditional requirement for them to contribute the capital from the day they join the LLP.

Also addressed in the draft legislation provision is the matter of avoidance in mixed member partnerships consisting of both individual and corporate members, where the individuals have ‘power to enjoy’ the corporate partners’ profits. The aim of this legislation is to ensure that individual partnerships members’ tax liabilities can’t be reduced through the allocation of profits to the corporate partners, thereby attracting a lower tax rate.

The Finance Bill 2014 is also set to include legislation relating to the disposal of assets through partnerships, as well as to transfer pricing compensating adjustments.