HMRC salaried partner tax proposals slammed ahead of 6 April deadline

HM Revenue & Customs (HMRC) has published its “dramatic” proposals for changes to the partnership tax regime, a move aimed at dealing with the so-called ‘disguised salary’ of LLP members that looks set to create upheaval in finance teams across the UK.


Tina Williams
Tina Williams

The draft legislation, which has also been designed to catch any potential tax avoidance schemes being used by firms, sets out the tests that will be applied to determine whether a member of an LLP will be treated as an employee for tax purposes.

As a result of the new guidelines it appears likely that LLPs with fixed-share members will need to overhaul their arrangements for remunerating them prior to 6 April 2014. The draft legislation was immediately slammed by numerous tax advisers and other professional services experts.

George Bull, the chair of the professional practices group at Baker Tilly, said HMRC had taken a “broad brush” approach that would create “a very real disadvantage” for firms using the partnership model.

Louis Baker, partner at national accountancy firm Crowe Clark Whitehill, echoed Bull when he said: “The salaried member proposals are dramatic and will potentially catch out many members of larger firms, particularly where the firm has complex profit sharing arrangements. Such arrangements may not be capable of being redrafted by 6 April 2014 and we’re likely to see far more than just junior members caught. 

The legislation will take effect from 6 April 2014, with anti-avoidance measures coming into effect from 5 December 2013 to catch any tax-motivated profit allocation structures.

Tina Williams, partner and head of the partnership practice at Fox Williams, said that LLPs with fixed-share members would need to change their arrangements for remunerating fixed-share members prior to 6 April 2014. 

An important consequence of an LLP member being reclassified as an employee will be that the employer’s national insurance contributions (NIC) would need to be paid by the LLP, effectively increasing the costs of remuneration for such individuals by 13.8 per cent.

“Any firms which have fixed-share members must now review those arrangements in light of these proposals and should prepare to discuss these issues with fixed-share members who will be affected by these changes,” said Williams.

Fox Williams senior associate Daniel Sutherland highlighted the risk that larger LLPs in particular seem to suffer due to these changes, as they may, quite legitimately, not want to reward members based on performance of the overall firm (which the legislation is pushing for), but on the performance of their practice area. 

“It is also unlikely that, in a large LLP, many members will have the requisite ‘substantial control’ over their firms and such LLPs may simply not require the level of capital contributions at the level suggested.”

Baker Tilly’s Bull added that the rules relating to partnerships with corporate members would “impede the genuine commercial plans of firms that are striving to retain profits to invest in the future of their business, so reducing their reliance on banks”. 

Pam Sayers, tax partner at Smith & Williamson accountancy and investment management group, said that from 6 April next year there would be three conditions of which only one would need to be satisfied to avoid the partner being treated as a salaried partner subject to PAYE/NIC and the firm subject to employers’ NIC.

The three conditions focus on quantum of variable profit share; influence on management decisions; and the amount of capital invested and at risk by the individual partner.

“We recommend that all LLPs review their current arrangements in light of the draft legislation for the Finance Bill 2014,” said Sayers.