| The changes to two aspects of the taxation regime for partnerships have been well documented and discussed since the announcements were first made in Budget 2013. The final period of consultation ended on 4 February 2014 and revised guidance and legislation on the “salaried member” rules was published by HMRC on 21 February and 7 March respectively.
Despite calls from the House of Lords for the changes to be delayed until 2015, the 2014 Budget confirms that the new rules will take effect from 6 April 2014, as originally planned. Disguised employment relationships This relates only to members of a Limited Liability Partnership (LLP). Since the introduction of LLPs, there has been an automatic presumption of self-employed status for LLP members for tax purposes. With effect from 6 April 2014, an LLP member who meets all of the following conditions will be a “salaried member” and will be taxed as an employee through the PAYE system: Condition A - 80% or more of the profit share payable by the LLP to the member is: - fixed,
- variable, but without reference to the overall profitability of the LLP, or
- not, in practice, affected by the overall profitability of the LLP
Condition B - The member does not have a significant influence over the management/affairs of the LLP as a whole Condition C - The member has made a capital contribution of less than 25% of their total expected profit share for the year In order to remain self-employed for tax purposes, each LLP member will need to fail one or more of these conditions. Mixed partnerships This aspect applies to all partnerships (not just LLPs). The new rules will principally affect partnerships where one or more of the partners is a limited company that is owned by individuals who are themselves partners in the partnership. With effect from 6 April 2014, any profit share allocated to a corporate partner that exceeds a “commercial amount” will be reallocated to those individual partners who have an interest in the company and taxed on those individuals as if they had received the profit share themselves. The “commercial amount” is the aggregate of a return on the capital the company has invested in the partnership, calculated on a commercial basis, and consideration for services provided by the company, and only by the company, to the partnership. An anti-forestalling measure was introduced with effect from 5 December 2013 to prevent partnerships from altering their composition in an attempt to circumvent this new rule.
General review of partnership taxation
Alongside the two changes explained above, the Office for Tax Simplification (OTS) has been reviewing the taxation of partnerships in general. Six short-term fixes in relation to HMRC guidance on partnerships have been identified as part of the OTS’s review and these will be implemented. A draft partnership manual will be published in April 2014 for comment, linking all of HMRC’s partnership guidance. This manual is likely to include a model partnership agreement. The feasibility of three further OTS recommendations will be examined by the end of 2014. Back to the Budget |