Partnership changes – action required before 5 April 2014

Have you discussed the partnership tax changes with your clients? More importantly have you reviewed your own structure in the light of these changes?

The Risks

Members of LLPs are in danger of losing self-employed status for tax purposes and will be taxed under PAYE and pay class 1 NIC from 6 April 2014.

Corporate partner structures will become ineffective from 6 April 2014. Profit shares attributable to the corporate partners will be reallocated to individual partners increasing the exposure to income tax and NIC. This may result in a need to dismantle such structures.

It is highly unlikely these new rules will be delayed therefore you only have six weeks to plan for these changes.

The changes

From 6 April 2014 two fundamental changes are being introduced which will affect the taxation of individuals working within partnership/LLP structures.

The first concerns salaried members of LLPs. Currently, members of LLPs are automatically treated as self-employed however, from 6 April 2014 salaried members will be taxed as employees if they meet three conditions which are set out in detail in Finance Bill 2014.

The conditions are that:

  1. The member is rewarded substantially through a fixed salary;
  2. The member does not have significant influence over the running of the LLP;
  3. The member’s capital contribution is less than 25% of his salary.

The second concerns partnerships or LLPs which have individual and corporate members. Where profit is allocated to corporate members, and one of two conditions is met, the profit sharing arrangements will be adjusted for tax purposes to ensure that excess profits are allocated away from the non-individual members.

The conditions are:

X. Where there are profit deferral arrangements in place;

Y. Where an individual has retained the power to enjoy profits attributable to corporate members.

 

Action needed now – don’t delay!

It is vital that you review your own business structure if it is likely it will fall within these rules and consider any restructuring to mitigate the adverse impact the changes will have. It is also equally important that you discuss these changes with all your partnership clients to ensure that they are aware and prepared for these important changes.

As always, we are here to support you understand the full impact of the changes and your options going forward. Therefore, if you think you or your clients are affected by these changes please call us now on 0845 4900 509 and ask for Paula Tallon, Paul Howard or Martin Mann.