The City of London Law Society (“CLLS”) and Institute of Chartered Accountants in England and Wales (“ICAEW”) have both submitted responses to the Finance Bill 2014 partnership proposals whereby certain members of limited liability partnerships will be reclassified as employees for tax purposes from 6 April 2014.

Both parties regard the proposals as being unclear, relying too heavily on non-binding, ambiguous guidance notes from HM Revenue & Customs, with a call being made for the new rules not to apply until at least 6 April 2015.

Payment for services

This test looks at how much of a member’s profit share is regarded as a disguised salary but the guidance fails to consider how profits are drawn in the year, ahead of final profit allocations, or how much of the profit pool should be considered for these purposes.

Further guidance on this test has been requested.

Significant influence

The second test used to determine whether an individual should continue to be taxed as a self employed person depends on whether he has significant influence over the LLP’s affairs, with doubt being cast by HMRC where a management committee might make day to day decisions, but where investment and strategic decisions such as agreeing to admit new partners or to acquire new offices is taken at full partnership level.

Clarity has been called for how this test will work in practice.

Capital contribution

This last test calls for at least 25% capital contribution to be made in reference to the disguised salary under ‘payment for services’.  Many LLPs are fully funded by bank borrowings, removing the need for individual partners to contribute high levels of capital and so this test may give an incorrect outcome.  Again, further guidance has been called for here.

Next Step

Further guidance will be issued on 17 February but many remain concerned about the pressure the new proposals are placing on LLPS, with many firms and members being unclear on how their business structures will be affected by the rules, with little or no time to implement commercial solutions.  Even with the new guidance, the Bill will not receive Royal Asset until July 2014, with the clauses being subject to change post implementation on 6 April 2014, which is clearly an unsatisfactory position.

We will update you when the additional guidance is issued next week.

CLLS Response ICAEW Response

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