All firms need to be aware of the new taxation treatment of salaried partners. Ian Cooper of Smith & Williamson, sponsors of BLS, has advice on the latest guidance.
HMRC has now issued updated guidance on the proposed legislation affecting ‘salaried partners’ of an LLP, despite the fact that the revised draft legislation is not yet available.
While this new guidance clarifies some issues, many uncertainties remain. In any event, LLPs and their partners should be undertaking an urgent review following the publication of this new guidance.
Under the latest proposals an LLP partner will be regarded as an employee for all tax purposes from 6 April 2014 where the partner meets all three conditions:
• Condition A (level of variable profit share);
• Condition B (significant influence); and
• Condition C (enough capital in the LLP) – this is tested at the start of each tax year, when an individual first becomes a partner, and whenever there is a change in the circumstances affecting the condition.
The latest guidance provides some helpful points of clarification, including:
• Two changes to Conditions A and C, that will now be in the legislation, are:
1. Condition A will be met where a partner’s profit share is largely fixed, ie 80% or more of the total remuneration;
2. Condition C – more time is being given to make the capital contribution, providing an unconditional commitment to contribute capital is in place:
– by 6 April 2014 for existing partners who have three months from then to make the payment;
– on joining for new partners who will have two months;
• For the anti-avoidance rules on the contribution condition, HMRC will look closely at arrangements of a circular nature and at the method of collecting interest payments, including firms meeting the interest payments. However, the guidance suggests that genuine commercial arrangements, such as contributing additional risk capital, should be acceptable.
The guidance contains many more examples, but unless a partner is firmly within one of the specific guidance examples, it is often unclear whether the legislation will apply. HMRC will not give clearances on how these rules apply until after Royal Assent, which is likely to be in July 2014.
For firms with partners meeting all three conditions, and taxed as employees going forward, HMRC has separately announced a staged deferral of the introduction of real time information (RTI) penalties:
• automatic interest charges on late in-year payments apply from 6 April 2014;
• penalties for late filing of submissions apply from October 2014; and
• automatic in-year late payment penalties apply from April 2015.
For a further discussion please contact Ian Cooper on 0117 376 2090 or email email@example.com