The changes are aimed at dealing with the so-called ‘disguised salary’ of LLP members. The background to this lies in one of the incidental benefits of LLP conversion, specifically the national insurance contribution (NIC) saving it generated. This was in relation to those LLP members who might not be full equity partners but were not classified for tax purposes as employed. Consequently, firms could escape paying employers’ NIC on their remuneration.
This quirk, which equated to saving a serious chunk of cash in a big firm, was notable enough to persuade numerous firms the LLP conversion process was worth enduring. Now HMRC is looking to slam the door on that handy loophole and reclassify these partners as employees, effectively increasing the costs of remuneration for them by 13.8 per cent.
Firms and their finance teams are going to have to react quickly to avoid this new tax-burden hell. One way will be to make sure their salaried members fail at least one of HMRC’s three tests aimed at identifying those in the employers’ NIC firing line, the most likely being that which relates to capital contributions. It goes like this: If a partner’s capital injection is more than 25 per cent of his or her fixed remuneration then they fail the test, they don’t qualify as a salaried partner and the firm doesn’t have to pay the NIC. Cue the salaried partner’s trip to the bank and a raft of firms effectively going all equity or imposing hefty capital calls.
A word of warning on this, though. The banks are likely to make their decision as to whether they will lend not on the quality of the individual but on the quality of the firm. And as the demise of firms such as Manches illustrate, things ain’t what they used to be with either the banks or HMRC.
“Conversations will be happening right now between firms and banks as to whether the latter is prepared to lend, but it’s a very different world from a few years ago when most City firms were seen as a good bet,” says the head of the professional practices group at Farrer & Co Jonathan Haley. “The bank will take a view on firm’s balance sheet rather than the individual. Firms shouldn’t be making any assumptions that they’ll be happy to lend.”
For chapter and verse on the changes and why they will result in “unnecessary complexities for firms”, don’t miss the opinion article by Baker Tilly’s George Bull.
Meanwhile, for fans of disruptive technology or admirers of the outspoken – or indeed anyone who likes both – check out our story on Rocket Lawyer and its less-than-shy founder Charley Moore. Sample quote on its lawsuit with rival LegalZoom: “If we weren’t getting sued by a slow and lazy incumbent it would mean that we weren’t pushing hard enough. LegalZoom’s decision to litigate and not innovate tells me that we will win this war as well as that battle.”
Much like the salaried partner NIC situation, this is a story that is certain to gather momentum next year, when The Lawyer Management fortnightly column will return. In the meantime, have a very happy Christmas and a prosperous New Year.