In his 2013 Budget, the Chancellor announced that the Government would consult on two perceived misuses of partnerships:

  • to remove the presumption of self-employment for limited liability partnership (LLP) partners, to tackle the disguising of employment relationships through LLPs; and
  • to counter the artificial allocation of profits to partners (in both LLPs and other partnerships) to achieve a tax advantage.

The consultation document was finally released on 20 May 2013 (click here to read in full) and has far reaching implications in its current state.
Disguised employment The consultation document states that LLPs are being abused to obtain a tax advantage by treating certain individuals as self-employed partners, leading to a loss of employment taxes, where such individuals would normally be regarded as employees.
We believe the law already adequately deals with the treatment of salaried partners (partners who are in reality employees of the business) and that HMRC are just not enforcing the current law in a robust manner. The consultation seeks to address this but may have far wider implications for further classes of partners.
Many partners choose to act through limited companies (corporate partners) and it is not clear if the disguised employment argument is meant to apply to such partners and if so, if this will be dealt with under IR35 or by other means.
We also believe commercial factors have not been adequately taken into account when considering whether an individual should be treated as a “salaried partner” and that certain fixed profit share partners will be caught despite the facts of the matter showing them to be partners of the business rather than simply employed managers.
A proposed targeted anti avoidance rule may prevent any changes to partnership arrangements made to stop the new rules from applying which may mean that if you seek to change profit and capital contribution arrangements now to protect yourself from the proposals, they may be ignored.
However, despite this and the fact that this is a consultation document only, it may be prudent to review certain aspects of the Members’ agreement such as ensuring each fixed profit share partner’s entitlement to share in the profits contains at least a 5% variable entitlement and has at least a nominal element of capital in the business.

Artificial allocation of profits The second part of the consultation document provides that where profit allocations in partnerships involving “mixed members” (typically a combination of individuals and companies) are made to a company to shelter profits from higher income tax rates, or where losses are allocated to individuals to benefit from higher rate reliefs, and where there is an (undefined) economic connection between the partners, the profits so allocated will be charged on the person with the economic interest.
So for example Mr and Mrs S are partners in a business, together with their limited company S Ltd. Profits are allocated to S Ltd in the year, where one of the main reasons for doing to is to reduce income tax liabilities for Mr and Mrs S. The profits allocated to S Ltd will therefore be charged on Mr and Mrs S under the proposed changes, based on their respective shareholdings in S Ltd..
The loss rules in particular look to seek to counteract certain capital allowance and GAAP schemes, but will also catch family partnerships which involve a corporate partner for sound commercial reasons, with the profit allocation rules also potentially catching situations where an individual is both an individual member for compliance purposes but who also acts through a corporate member for profit sharing purposes.
Finally, the Tax Impact Assessment comments that whilst some small businesses may be affected by the proposals, the majority of the tax yield is expected to come from large professional partnerships, which may not be accurate.
It is important to note that this is a consultation only but with any legislation intended to apply from April 2014, it is important that the scope of the proposals are narrowed. We will therefore be taking part in the consultation process and will keep you updated of any progress.

For further information please contact Tracey Watts on 01823 286096 or email

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