Partnerships Update – March 2014 Edition

In this edition of Field Fisher Waterhouse's Partnerships Update we highlight:

HMRC's latest guidance on the new tax rules for salaried members. The Office of Tax Simplification's interim report on partnerships. A recent Court of Appeal case which explores the court's discretionary power to dissolve a partnership. We hope you find this of interest.

1. HMRC issues new guidance on new salaried members rules

   In recent Partnership Updates we have reported on HMRC's new rules for partnerships. A key element of the new rules is HMRC's proposal to introduce a three step test to determine whether an LLP member is an 'equity member' or a 'salaried member' - the latter being treated as an employee for tax and NICs purposes.

   A member will be a 'salaried member' if all the following conditions are met:

   Condition A: The member performs services for the LLP in his or her capacity as a member, and is expected to be wholly or substantially wholly rewarded through a 'disguised salary' that is fixed or, if varied, varied without reference to the profits or losses of the LLP. Condition B: The member does not have 'significant influence' over the affairs of the partnership. Condition C: The member's contribution to the LLP is less than 25% of the 'disguised salary'. These new rules, and accompanying anti avoidance rules, are expected to come into force on 6 April 2014.

   In February HMRC issued new technical guidance on the new salaried members rules. The new guidance can be found here. By and large this guidance is made up of examples - over sixty of them - which are designed to help people understand how the new rules will be applied. There are too many to go into in this Partnership Update, but the new guidance is well worth a read.

   The guidance does also flag two changes to the proposed legislation:

   Regarding Condition A, the references to wholly or substantially wholly will be clarified in the legislation, setting the threshold at 80%, so the new test will be whether the member performs services for the LLP and 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'. Regarding Condition C, concerns were raised about whether firms who wanted to refinance their membership contributions would be able to do so in time (bearing in mind the new legislation will come in to force on 6 April this year). HMRC has confirmed that, to avoid the position where individuals are treated as employees...