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Taxation of Partnerships

 

Posted on 21 February 2014

Following extensive consultation HMRC have recently issued draft legislation dealing with the taxation of LLPs. The new rules address two key areas of partnership taxation:

1)      Use of mixed partnerships (i.e. having corporate members);

2)     Salaried / fixed profit share partners

Anti-avoidance legislation is being introduced to address both of these. In summary, for mixed partnerships the anti-avoidance legislation is designed to enable HMRC to reallocate profits and losses on a just and reasonable basis. As regards, salaried / fixed profit share partners, they will be treated as employees (rather than self employed as is currently the position) unless they fail one of the following three tests:

1)      The member is remunerated for his services “wholly or substantially wholly” (80% or more) with “disguised salary” (i.e. remuneration which is fixed or, if variable, the variable element does not relate to the profits of the LLP as a whole. Thus, in order to fail this test, at least 20% of the members profit share must be directly related to the performance of the firm;

2)     The member does not have significant influence over the affairs of the LLP;

3)     The members capital contribution is less than 25% of his annual “disguised salary”

Although HMRC are still taking representations in respect to the above, they are not expected to make any fundamental changes to the rules as drafted. The above legislation will apply from 6 April 2014. Thus, any partnerships operating under an LLP structure need to review their structure and reward mechanism to ensure they are not caught by the above changes.

In addition, this offers an ideal opportunity for all partnerships to stand back and review their current structure. In addition to the tax rules, the demise of several legal firms and the introduction of ABS structures, are leading many practices to re-assess their structure.

Smith Cooper tax are currently providing advising partnerships in respect to optimal partnership structures, disposals of partnerships, entrepreneurs relief and succession planning.

If the above impacts you or you would like to discuss please contact Jackie Hendley or Richard Stanley

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