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Hill Dickinson is consulting on its second cash call in 12 months in response to HM Revenue & Customs’ (HMRC) change to the partnership taxation rules, which will come into effect on 6 April.
Following approximately 12 consultation meetings around the country, Hill Dickinson managing partner Peter Jackson has recommended a capital investment of 30 per cent of salaried partners’ total remuneration in exchange for one equity point.
The consultation started a fortnight ago and a final decision will be made following a vote at the end of this month.
The firm aims to have collected the extra capital by 31 March and will address the profit share aspect of the new arrangements for salaried partners after the 6 April deadline.
Jackson said it has been the firm’s policy for the last five years that all partners should be members of the LLP and self-employed, hence the firm’s decision not to transfer them to employee status and pay the national insurance contributions that would entail itself.
Hill Dickinson’s membership agreement will not be rewritten as part of the process because it includes a mechanism for amending the firm’s capital structure.
Salaried partners currently invest no capital in the business and have the minimum statutory level of voting rights, although Jackson said this is also under consideration to change.
Hill Dickinson’s fixed-share and equity partners were subject to a call for extra investment last summer, when the firm collected £2.8m from partners to stabilise its balance sheet after a year of heavy investment (17 August 2013).
Jackson said: “Last year’s cash-call affected fixed-share equity partners but not the salaried members. The new rules affect them so we will look at a capital call.”
It is the latest of a raft of consultations at firms with salaried members in response to the new rules, which seek to clarify the definition of LLP membership.
The legislation comprises of three conditions aimed at determining whether fixed-share or salaried partners should be classified as employees for tax purposes in a bid by the taxman to clamp down on the tax benefits of so-called ’disguised salary’ (17 December 2013).
A capital call raising the level of funds contributed by a salaried partner could potentially see a firm fail the third condition, which states that partners with more than 25 per cent of their earnings invested in the business will qualify as self-employed. As a result, firms are expected not to be required to pay the national insurance on these individuals.
DWF and Weightmans were the first firms to confirm that they were reviewing the way they define fixed-share partners (7 January 2014), with TLT expected to use the rule changes to boost its coffers by at least £1.2m in a move revealed earlier this month (10 February 2014).