UK: Partnerships Update – March 2014 Edition

Last Updated: 14 March 2014
Article by Guy Burman and Nicholas Thompsell

In this edition of Field Fisher Waterhouse's Partnerships Update we highlight:

  • HMRC's latest guidance on the new tax rules for salaried members.
  • The Office of Tax Simplification's interim report on partnerships.
  • A recent Court of Appeal case which explores the court's discretionary power to dissolve a partnership.

We hope you find this of interest.

1. HMRC issues new guidance on new salaried members rules

In recent Partnership Updates we have reported on HMRC's new rules for partnerships. A key element of the new rules is HMRC's proposal to introduce a three step test to determine whether an LLP member is an 'equity member' or a 'salaried member' – the latter being treated as an employee for tax and NICs purposes.

A member will be a 'salaried member' if all the following conditions are met:

  • Condition A: The member performs services for the LLP in his or her capacity as a member, and is expected to be wholly or substantially wholly rewarded through a 'disguised salary' that is fixed or, if varied, varied without reference to the profits or losses of the LLP.
  • Condition B: The member does not have 'significant influence' over the affairs of the partnership.
  • Condition C: The member's contribution to the LLP is less than 25% of the 'disguised salary'.

These new rules, and accompanying anti avoidance rules, are expected to come into force on 6 April 2014.

In February HMRC issued new technical guidance on the new salaried members rules. The new guidance can be found here. By and large this guidance is made up of examples – over sixty of them – which are designed to help people understand how the new rules will be applied. There are too many to go into in this Partnership Update, but the new guidance is well worth a read.

The guidance does also flag two changes to the proposed legislation:

  • Regarding Condition A, the references to wholly or substantially wholly will be clarified in the legislation, setting the threshold at 80%, so the new test will be whether the member performs services for the LLP and it is reasonable to expect that at least 80% of the amounts payable by the LLP for the member's services will be 'disguised salary'.
  • Regarding Condition C, concerns were raised about whether firms who wanted to refinance their membership contributions would be able to do so in time (bearing in mind the new legislation will come in to force on 6 April this year). HMRC has confirmed that, to avoid the position where individuals are treated as employees for a short period whilst they obtain finance in order to invest capital, the legislation is being amended. Condition C will not be satisfied if:

    • at 6 April 2014, there is an unconditional requirement for that member to provide the capital; and
    • the capital is contributed within 3 months from 6 April 2014.

If the member does not contribute the capital within 3 months, then their position has to be reviewed.

There is much that is useful and welcome in the revised guidance. For example, it is clearer from the revised guidance that the 80% test in Condition A can be looked at in appropriate circumstances over more than one accounting period. It is also made clear that provided a profit share is expressed as a percentage of the profits of the firm, this profit share does not become disguised salary merely because those profits are very stable and predictable. This point appears to open opportunities, where an LLP is part of the group, to use structures which stabilise the profits of the LLP as a way of persuading fixed-income partners to take the risk to give up a profit share expressed as a fixed income in favour of a variable profit share.

The revised guidance should operate as a reminder that LLPs should be reviewing their arrangements now as a matter of urgency so they are clear what position they will be in at the start of the new tax year.

2. Tax simplification

There is a hint of irony that, while HMRC is re-shaping the tax rules for partnerships under the tax avoidance banner, the Treasury's Office of Tax Simplification has been commissioned to consider simplifying the taxation of partnerships. Its interim report was published recently and can be found here.

While the OTS is due to re-visit these issues later this year, the emerging themes are:

  • The tax system needs to take a more strategic approach to partnerships. Tax policy and administrative processes have generally been designed with sole traders and corporations in mind. Partnerships are not considered to be a focus.
  • HMRC needs to coordinate its partnership work and support in a different way. HMRC does not have a partnerships customer directorate, nor does it have a senior civil servant with sole responsibility for partnerships across the range of all taxes.
  • Partnership tax rules are spread out across legislation and HMRC guidance. However the OTS's view was that there seems to be little desire for a consolidated taxes act for partnerships.
  • The "one size fits all" approach of partnership tax leads to extra burdens and complexities for small partnerships, when compared to sole traders with similar sized businesses. The report recommends some short term fixes, including:

    • BIS to re-publish their model partnership agreement;
    • publishing a manual of consolidated guidance for partnerships;
    • let interest on income be entered in gross on short return;
    • changing the corporation tax self assessment return to include a section for income from a partnership;
    • HMRC to clarify when partnerships are eligible for entrepreneurs' relief (particularly regarding possible relief on subsidiary companies held by an LLP);
    • the process for issuing unique taxpayer references to foreign partners needs to be streamlined;
    • creation of a form of general remittance basis investment relief for groups of non-domiciled individuals investing in UK investment partnerships;
    • HMRC to create free software for the smallest partnerships;
    • HMRC guidance should be clearer on stamp duty land tax (SDLT) liabilities following changes in profit sharing ratio;
    • there needs to be a review and update of the guidance on inheritance tax for partnerships;
    • HMRC to clarify their requirements as regards limited partnerships and joint ventures for the purposes of VAT registration, where the present published guidance seems unclear; and
    • HMRC to give clear guidance on VAT grouping for LLPs.

3. Case review: Dissolution of a partnership

The landmark, and somewhat controversial, case of Hurst v Bryk (2002) 1AC 185 established the principle that the contractual doctrine of repudiation does not apply to the dissolution of a partnership -essentially on the grounds that such an application of this doctrine would be incompatible with the court's statutory power under section 35(d) of the Partnership Act 1980 to dissolve a partnership when 'a partner ... wilfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself ............ that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with him'.

The recent case of Bishop v Golstein (2014) EWCA Civ 10 considered the question of whether one partner's conduct could nevertheless be viewed as the cause of the early termination of a partnership, and as a result entitle the other partner to bring a claim for damages.

The case concerned a falling out between two solicitors, a Mr Bishop and a Mr Golstein. The 'innocent partner', Mr Golstein, had various serious complaints about Mr Bishop's conduct. These included:

  • Mr Bishop telling the partnership accountants not to send draft accounts to Mr Golstein.
  • Mr Bishop purporting to terminate the lease of the partnership premises without consulting Mr Golstein.
  • Mr Bishop refusing to discuss partnership matters with Mr Golstein.
  • Mr Bishop excluding Mr Golstein from management decisions.
  • Mr Bishop failing to require or encourage partnership staff to respect Mr Golstein's authority as a partner.

Mr Golstein had originally brought his claim for damages on the basis that Mr Bishop had repudiated the partnership agreement. The High Court confirmed (following Hurst v Bryk) that the contractual doctrine of repudiation does not apply to the dissolution of a partnership. Instead, the High Court found that the parties had reached a mutual agreement to dissolve the partnership early, but that Mr Bishop's agreement to this early termination had been caused by the wrongful actions of Mr Bishop and that Mr Bishop was entitled to compensation accordingly.

The Court of Appeal considered various arguments from Mr Bishop, including that there could have been no contractual repudiation by Mr Bishop because, first, Mr Golstein 'affirmed' the partnership (by continuing to work and receive drawings) and, second, there was no 'last straw', no final incident which triggered the repudiation. The Court of Appeal dismissed these arguments, largely because they stemmed from an incorrect assumption that the contractual principles of repudiation (including affirmation and the last straw doctrine) were relevant in a context where the dissolution of the partnership was to be governed by the court's a discretionary powers under section 35(d) of the Partnership Act 1980, rather than under the contractual principle of repudiation.

In deciding the appeal in favour of Mr Golstein, Briggs LJ said: 'If one partner, in breach of his duty to his fellow partner, seeks to squeeze him out or otherwise to conduct himself in a manner which makes it intolerable or impracticable for the other partner to continue to carry on the business with him in partnership, and this causes the innocent partner to dissolve or agree to the dissolution of the firm earlier than would otherwise have occurred, then it is plainly necessary for the law to recognise some means whereby the innocent partner can be compensated for consequential loss'.

The case is interesting in demonstrating the ability of the court to find a means of remedying a loss suffered by a partner in the circumstances, and for its commentary around the application of Hurst v Bryk. It will be required reading wherever a partnership dissolves in acrimony. It should be noted, however, that the decision applies only to general partnerships – LLPs are an entirely different ball game.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.