On 27 March 2014, HMRC issued some helpful revised guidance on the draft legislation for salaried members of LLPs.

The new guidance on salaried members clarifies the following:

  • The form of undertaking required to evidence the commitment to make a capital contribution does not need to be legally enforceable; as long as the member had provided a letter of intent before 6 April that is enough. This is helpful for existing members looking to fail condition C (the capital contribution condition) to ensure members are not treated as employees.
  • The anti-avoidance rules in relation to capital contributions will not be triggered just because:

    • the interest on a loan to fund capital contributions is paid by the firm as agent and then charged to the relevant partner's drawings account; or
    • the individual uses the same lending bank as the firm, so funds derive from and are deposited back with the same bank (provided the firm's borrowing facility is not reduced as a result).

We also understand that:

  • an existing or a new member with only a limited time before retirement when they introduce capital will not be subject to anti-avoidance provisions just because of the length of time they expect to continue as a partner
  • some deemed employees can obtain an income tax deduction for interest on loans to contribute capital, providing they are seen as sufficiently senior employees.

One point we are still waiting for clarification on is:

  • whether being a deemed employee affects the ability to claim entrepreneur's relief.

Mixed partnerships

In addition, HMRC has updated the guidance on the draft legislation for mixed partnerships as follows:

  • The legislation has been updated to include a further situation demonstrating 'power to enjoy'. This is where an individual is a party to arrangements, the main, or a main, purpose of which is to secure that an amount included in a company's profit share is chargeable to corporation tax rather than income tax.
  • The mixed partnership guidance concerning the profit allocation arrangements now specifically states that where before 5 December 2013 partners have ceased to be partners in favour of limited companies in which they have an interest (so that the partnership consists only of limited companies), it cannot be inferred that the individual would have been a member (partner) but for the new rules. This means the mixed partnership anti-avoidance rules would not apply to those partnerships and LLPs consisting entirely of corporate partners/members that were structured in this way before 5 December 2013.
  • Many people oriented businesses have been transferred from companies to LLPs with the company retaining an interest in the LLP. The guidance includes further examples illustrating those arrangements that would and would not be caught by the legislation. There are also examples illustrating how the rules apply in private equity arrangements.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.