Suyu LLP is a niche, high end litigation practice, and an ABS. Like many practices, it has a combination of ‘equity’ and ‘fixed share’ partners, in fact four of each. All eight are self-employed, have been since 2003 when the practice was originally set up, and are very settled that way. There are ten members of staff, all of whom are presently employees.
Suyu is no different from many other boutique litigation practices in that it accepts many cases on a no win no fee basis, and therefore has a very substantial working capital requirement. It also has very unpredictable profit streams, which can be very high, or not, depending on its fortunes.
Suyu’s Christmas party was on the night of Tuesday 10 December, coincidentally, the same night as HMRC’s policy setting team, and even more coincidentally, at the same venue.
The four fixed share partners, Jaz, Baz, Maz and Daz, had all been looking forward to letting their hair down. That is, until they had read the new draft HMRC legislation on the future tax treatment of partners in LLP’s, which had been released earlier that day. Only a few hours later, Jaz and Maz were at the bar, and full of smiles, whilst Baz and Daz looked a bit glum.
Jaz has just been appointed Suyu’s finance partner. He has a young family and likes financial certainty. He has no capital at all invested in Suyu, and a 100% fixed profit share too. He has always wondered if he really ought to be treated as self employed for tax purposes. However, as he is fully involved in the management of Suyu, he can rest easy post 5 April 2014, knowing that his self employed status will remain.
Maz also has a fixed profit share (£300,000), and is the brother-in-law of one of the ‘equity’ partners. He has little idea about how to run a law firm and is let nowhere near the finances. A few years ago he introduced £80,000 of capital into Suyu following constant nagging from his wife Lou, as Suyu was on the verge of winning a big case, but was also on the verge of running out of working capital. Maz does not feel overly worried about the security of this money as Lou’s Dad, Brad, has said he will always ‘see Maz alright’.
Maz is at the bar with Jaz, feeling very relaxed.
Baz is at the other end of the bar, staring into space towards the HMRC table, and holding the keys to his Suyu owned Range Rover. He is on a semi-fixed profit share (a basic amount of £300,000, so the same as Maz), has equally little idea about law firm management, and has introduced no capital into Suyu. A few years ago though, when Baz was an ‘equity’ partner, and Suyu was under some financial pressure from the bank, Baz bought the freehold off the remaining partners as he believed that commercial property was the way forward. The bank offered 100% loan to value and, without thinking, he took the offer. Baz now realises that this was not a great investment after all, as the value of the property has fallen significantly and the property has no suitable alternative use.
Very clearly, Baz has a significant amount of financial risk associated with Suyu, but is facing employment status for tax purposes, a company car tax bill of £15,000 per year going forward, and is certain that the four ‘equity’ partners of Suyu will shortly be pressing him to agree to a reduction in his profit share of about £35,000, to fund the annual employer’s national insurance liability. If only he hadn’t rushed into buying the property. If he hadn’t, he could probably borrow from the bank now to introduce capital into Suyu, and be at the happy end of the bar.
Next to Baz is Daz, looking equally glum. He too has a fixed profit share and little capital in Suyu following his divorce. Up until recently he had been Suyu’s finance partner, and fully involved in the management of the firm with the four ‘equity’ partners. A major class action litigation case had come along, that will fully absorb his time for at least the next two years, and he would be spending most of his time working 200 miles away from Suyu’s office, so could not be involved in management anyway. Employment status therefore beckons for Daz, and the prospect of a reduced profit share a la Baz.
Suyu’s two receptionists are sisters, and very bubbly in personality. Baz and Daz’s staring sees them both wearing their Santa hats, and sat at the HMRC table. They are chatting enthusiastically about Suyu’s new initiative where any staff member can inject capital into the firm, receive an annual investment return of up to 13.8% of their salary, and become self employed…….
Hazlewoods Legal Team