Changes to partnership taxation—what you need to know

Changes to partnership taxation—what you need to know

How will the new guidance on limited liability partnerships (LLPs) affect the way law firms operate? Andrew Allen, partner and specialist in the legal sector at Francis Clark, Chartered Accountants looks at the implications of the new guidance for both LLPs and individuals.

Original news
Following consultation, HMRC has revised its guidance on the draft Finance Bill legislation containing the limited liability partnership salaried members rules, which will treat members as employees where three main conditions are met. Legislation for the 'disguised salary' condition (condition A) will now make explicit the 80% threshold for the condition to apply. The capital contribution condition (condition C) will now take into account a firm commitment to contribute capital within three months of 6 April 2014 (two months where the member joins on or after 6 April) when deciding whether the 25% condition is met.

How will the new rules on LLPs impact law firms?
From 6 April 2014, in order to remain self-employed, a member of an LLP must avoid meeting at least one of three specific conditions. These concern whether there is a disguised salary (Condition A), whether the member has significant influence (Condition B) and what level of capital the member has at risk (Condition C).

Condition A is met where a member’s income is substantially fixed. For a member to not be caught by this condition their profit share must be both linked and directly related to the overall profits of the firm. It is designed to identify arrangements that are akin to employment with a salary based on personal performance. The rules focus on what a member could reasonably expect to receive. There are a wide range of examples in ‘Partnerships: A review of two aspects of the tax rules Salaried Members Rules: Revised Technical Note and Guidance’ (the Guidance) issued by HM Revenue & Customs (HMRC) on 21 February 2014 on how disguised salary could be assessed. Most are broadly common sense interpretations of similar themes

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.