LLP Law Firms “Must Review Partnership Agreements Before April 2014”
16 Dec, 2013
Angela Haig (pictured), Tax Partner with accountants Henderson Loggie, is warning that legislative changes announced in the Finance Bill 2014 concerning taxation of partnerships will have a major impact on many law firms. Two important changes have been announced, both of which will impact on firms registered as Limited Liability Partnerships (LLPs).
The first change will affect LLP firms which have salaried partners, while the second will affect all partnerships, including LLPs, where profits are allocated to a corporate (i.e. non-individual) partner.
Angela Haig comments: “The change affecting salaried partners will have quite an impact on those individuals and on those firms in which they are partners, with taxation repercussions for both. The Government has stated it is aiming to ‘make the tax system fairer by ensuring that employment taxes are paid by LLP members who are essentially employees and the LLP as employer.’ They are targeting firms which have salaried partners who do not meet three key conditions, and failure to satisfy these requirements will mean the individual will be taxed as an employee and that the firm will have to pay the appropriate NIC and other employee related taxation.
“To be assessed as a salaried partner – as opposed to an employee – the individual must meet three conditions, which are that at least 25% of their salary must be profit dependent, they must be shown to have demonstrable influence in decision making within the partnership, and they must make a capital contribution of at least 25% of their fixed salary to the firm’s capital, thereby demonstrating an element of risk sharing.
“This change is likely to hit a substantial number of law firms, as registering as an LLP has been a preferred option for many since the Limited Liability Partnership Act was introduced in 2000.”
Angela Haig continues: “The second change, again according to the Government, is to ‘make the tax system fairer by preventing tax-motivated allocations of business profits and losses in mixed membership partnerships, including limited liability partnerships.’ Essentially, the Government is acting to close what they see as a tax avoidance loophole.
“This is where profits are allocated to a limited company set up as a corporate partner in a partnership. The partners in the firm are the directors of the limited company and have been able to draw dividends from the limited company and pay Corporation Tax, a lower level of taxation than if they had been taxed under Income Tax.
“While this second change may affect fewer law firms than the change regarding salaried partners, both legislative moves – which will come into effect in April 2014 – mean that all LLPs will have to carry out rigorous examinations of their partnership agreement and many will have to make important decisions, in particular in respect of how they wish to treat their salaried partners.”