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Following the last Budget, HMRC have recently published a consultation document on the taxation of partnerships and LLPs. This covers two aspects, with the intention being to legislate on changes to be effective from April 2014.
The first area the consultation covers is the basis of taxation of LLP members whose terms resemble those of employees.
In a traditional partnership, partners with a fixed profit share or salaried partners are treated by HMRC as employees with PAYE and National Insurance Contributions payable. Factors such as profit sharing and risk need to be present for partners to be treated as self-employed. However, for LLPs the situation has been different with even salaried members being treated as self-employed.
Following the consultation it is likely that from April 2014 LLP members will no longer have special treatment.
We have experience in protecting the status of individuals in professional and other partnerships and would be happy to talk to LLP firms who may be adversely affected by any change and wish to review their position.
The second area covered by the consultation relates to profit allocations in partnerships that include at least one corporate partner as well as individuals. These structures give firms the potential to benefit from lower corporate tax rates while continuing to have the flexibility of a partnership or LLP, and HMRC is seeking to limit this and to discourage situations where it feels the benefits are being exploited.
HMRC specifically recognise that there are certain circumstances where there are what the taxman would call legitimate reasons for having a corporate partner, such as raising finance and dealing with succession issues. However, the consultation document is concerned that the company may be receiving an excessive profit share for what it does.
At Armstrong Watson we have always believed that such corporate partners should have a commercial role and it would seem that there could well be a grey area of situations where any changes could catch more innocent arrangements.
Draft legislation is unlikely to be published until December at the earliest, but it is likely that the level of profit that can be allocated to a company will be under scrutiny. In the meantime we will be reviewing the options available for such clients and holding business structure review meetings to consider these options in more detail.
To read our response to the consultation please click here. If you have any questions please do not hesitate to contact one of our tax consultants.
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Armstrong Watson LLP is a limited liability partnership registered in England and Wales, number OC415608. The registered office is 15 Victoria Place, Carlisle, CA1 1EW where a list of members is kept. Armstrong Watson LLP is regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. Unless otherwise indicated, either expressly or by the context, we use the word “partner” to describe a member of Armstrong Watson LLP or an employee of Armstrong Watson LLP in their capacity as such.
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