Changes To The Taxation Of Partnerships

Last week the Government published its consultation document on the taxation of partnerships. The consultation, which was foreshadowed at the 2013 Budget, sets out two areas of reform:

Under statutory footing, certain members of an LLP (i.e. so called "salaried partners") will be deemed to be employees for tax purposes. In consequence, these members will be subject to employee NICs and the LLP will be obliged to account for PAYE and pay employer's NICs. To close down arrangements which seek to, as far as HMRC is concerned, artificially take advantage of and arbitrage the different tax attributes of members of a so-called mixed member partnership (i.e.: partnerships comprising individuals and corporates, or residents and non-residents) by either allocating profits or losses in such a way so as to minimise the overall tax liability of the members. The proposals, if implemented, are intended to come into force in April 2014, and no grandfathering of existing arrangements is proposed.

The effect of the proposals on partnerships operating in the asset management and financial services industry (including hedge funds and private equity firms) will need to be considered carefully, in light of the important regulatory changes (including AIFMD, CRD IV and the FCA's Remuneration Code) facing such industry.

These developments are discussed in more detail below. A link to the consultation document can be found here.

  1. Treating so called salaried partners of LLPs as employees for tax purposes

    This aspect of the consultation concerns only LLPs and will apply to individuals who come within the newly introduced definition of "salaried member", defined as:

    A member of an LLP who is an individual and who, on the assumption that the LLP is carried on as a partnership by two or more members of the LLP, would be regarded as employed by that partnership (the "first condition"); or A member of an LLP who does not meet the first condition but who broadly speaking (a) bears no economic risk (loss of capital or repayment of drawings) in the event that the LLP makes a loss or is wound up; (b) is not entitled to a share of the profits; and (c) is not entitled to a share of any surplus assets on a winding-up. For affected individual taxpayers and the LLP itself, this legislation, if adopted, will result in partnership distributions being treated as "earnings" for PAYE and NICs purposes. In other words, the LLP will be required to pay employer NICs as a deemed employer of its salaried members, and will also be required to withhold PAYE and employee NICs in respect of salaried members, in the usual way as if such salaried members were employees.

    HMRC has couched the salaried members proposals as a statutory reversal of the presumption that an individual member will not be treated as an employee of an LLP for tax purposes. This would put members of an LLP on equal footing with partners in a general partnership, in the sense that under the new proposals a member of an LLP would be treated as an employee (and not as a partner) in exactly the same circumstances where a person held out as a partner in a general partnership would be treated as an employee (and not as a...

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