HMRC to press ahead with LLP tax changes on 6 April but offers some concessions

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24 February 2014

HMRC: extra time to make capital contributions

Controversial changes to the taxation of LLPs will go ahead on 6 April, HM Revenue & Customs (HMRC) announced late last week, but has made some small concessions in response to the concerns of lawyers and others – including giving more time to contribute capital.

On Friday afternoon HMRC published a revised technical note and guidance on the new salaried members rules, which aim to catch partners of LLPs who are treated as employees.

Calls for the tax man to ditch or at least delay the new rules – which were announced in December’s Autumn Statement and were then subject to an informal consultation which received a lot of critical responses – have fallen on deaf ears.

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An LLP member will be treated as an employee for tax purposes if they receive a “disguised salary”, do not have “significant influence” over the affairs of the partnership, and their capital contribution to the LLP is less than 25% of the disguised salary. They must meet all three conditions.

The guidance – which includes a host of examples – said a disguised salary is an amount that is either fixed, variable but not with reference to the LLP’s profits and losses, or not in practice affected by the LLP’s profits or losses.

HMRC said this would catch fixed profit shares, but not payments made on account of an expected profit share.

One change as a result of the consultation is that it will be explicit that the new rules apply where 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.

Members with “significant influence” include those are involved in the management of the business as a whole, or senior members who may have little interest in day-to-day management – which they leave to others – “but their roles and rights mean that they can exert significant influence over the business as a whole”.

Recognising the pressure of arranging finance for a capital contribution by 5 April, the guidance has given them an extra three months to come up with the case so long as there is a “firm commitment in place” to contribute capital. Those becoming members on or after 6 April will have two months.

HMRC emphasised that the test is a prospective one. “Provided that the test is applied reasonably, the test is not revisited with the benefit of hindsight if it is found that any of the assumptions were incorrect.”

George Bull, head of professional practices at accountants Baker Tilly, said: “The revised guidance notes represent a modest step in the right direction.  However, there is now no doubt that the new rules will take force from 6 April 2014: this is the time to assess how firms will be impacted specifically and what steps should be taken in the light of that knowledge.”

PwC Legal said the changes should mean that fewer partners are affected by the new rules. Partner Stuart Hatcher said: “The rules have been clarified to some degree, with some helpful examples. It should be easier for true partners to keep their self employed status.

“Partnerships now need to get moving and assess how they might be affected. Many firms had been waiting for the revised rules, and there’s now just six weeks until the new regime is in place.”

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