UK: Autumn Statement 2013: Changes To Partnerships

Last Updated: 20 December 2013

Following its announcement at Budget 2013, the UK Government issued a consultation document in May 2013 considering changes to two aspects of the partnership tax rules: "disguised employment relationships" in connection with certain members of LLPs and certain arrangements involving the allocation of profits and losses among partnership (not just LLP) members.

In the recent Autumn Statement 2013, the Government announced that changes involving the allocation of profits and losses in mixed partnerships and disguised employment relationships will come into effect from 6 April 2014. In addition, some anti-avoidance rules were also announced that came into effect immediately (from 5 December 2013).

Proposed changes to mixed partnerships

Under current tax rules, individual members of partnerships are subject to income tax and national insurance as self-employed partners, whilst corporate members are liable to corporate tax according to their respective profit shares (if UK resident). Corporation tax rates are typically lower than income tax and national insurance contributions which the Government believes has led to abuse.

Legislation will be introduced into the 2014 Finance Bill to reallocate "excess profits" allocated to a non-individual partner (typically a company) to an individual partner where all of the following conditions are met:

  • A company within the partnership receives a share of the partnership's profit;
  • The company's share is excessive;
  • An individual partner has the power to enjoy the company's share (or there are deferred profit arrangements in place); and
  • It is reasonable to suppose that the whole or part of the company's share is attributable to that power or those arrangements.

HM Revenue & Customs (HMRC) has also stated that the legislation will include necessary provisions so that excess profits can be reallocated to an individual who is not a partner if it is reasonable to suppose that the individual would have been a partner had the new rules not been introduced and the whole or part of the company's share is attributable to the individual's power to enjoy the company's share of the profits or the deferred profit arrangements.

HMRC has also confirmed that it will introduce legislation into Finance Bill 2014 in order to prevent individual partners from obtaining excessive income tax loss reliefs and/or capital gains tax reliefs in situations where the individual is a party to arrangements where some or all of the loss is allocated, or arises, to the individual instead of the company.

HMRC stated in the initial consultation document that the proposed changes are not intended to affect those entering into arrangements that are not tax-motivated, but are intended to deter arrangements that exploit the tax treatment of mixed membership partnerships.

Proposed changes to disguised employment arrangements

Individual members of an LLP are currently taxed as partners even if they have fixed salaries, are not exposed to risk, take no substantive role in the management of the business and have no rights to profits or assets if the partnership ceases. This tax treatment applies even if they are engaged on terms such that the individual would normally be regarded as being closer to those of an employee.

Legislation will be introduced into the 2014 Finance Bill to treat some "salaried" members of an LLP as employees for both income and corporation tax purposes. The new rules will apply when an individual is a member of an LLP and all of the following conditions are met:

  • An individual performs services for the LLP and the amounts payable by the LLP in respect of the individual's performance of those services will be wholly, or substantially wholly, fixed, or if variable, variable without reference to, or in practice unaffected by the overall profits or losses of the LLP ("disguised salary");
  • The mutual rights and duties of the LLP and its members do not give the individual any significant influence over the affairs of the LLP; and
  • The individual's contribution to the LLP is less than 25% of the "disguised salary".

An individual who is a member of an LLP and is caught by these new rules shall be treated as an employee for tax purposes, and subject to PAYE and national insurance on "salary" and benefits. In addition, employer's NIC contributions will be due at a rate of 13.8%.

Verfides' comments

It seems clear that the proposed changes will discourage the use of corporate entities as members of partnerships, in circumstances where the shareholders of a corporate entity are also individual members of the partnership, or connected with individual members of the partnership (for example, spouses and civil partners).

Therefore, it will be necessary for many mixed partnerships to review their tax structuring.

It will also be necessary for LLPs to review the terms on which salaried partners are engaged on to ensure that PAYE is correctly operated on any partners who meet the three conditions above with effect from 6 April 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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