​HMRC green lights cash calls but slams door on firms cutting debts

HMRC has given the green light to a wave of capital calls at LLPs across the UK, but its much-anticipated updated guidance on the tax treatment of salaried members is still likely to give firms several finance-related headaches.

Legal market tax specialists broadly welcomed Friday’s new guidance on HMRC’s rules, which were first unveiled last December (17 December 2013).

“Calls for the new rules to be scrapped altogether, or postponed until 6 April 2015 to enable them to be properly evaluated, have not been heeded,” said George Bull of Baker Tilly. “[But] it is clear from the document … that a number of small but significant changes have been made.

In the guidance HMRC confirmed that the new rules would come into force on 6 April, despite intense lobbying in some quarters for a delay of up to a year.

But it also said that a capital injection of funds by fixed-share partners (FSPs) would be accepted as proof of their self-employed status and, as expected, offered an additional grace period of up to three months for partners to get financing in place.

However, it warned that anti-avoidance rules would be triggered if a firm used the new funds to pay off other debts, stating: “HMRC would consider the TAAR [targeted anti-avoidance rule] to be in point if the contribution is provided as part of an arrangement where… there is to be a reduction in the firm’s indebtedness to the bank.”

This point has mystified accountants, who argue that using an injection of fresh funds to pay off more expensive borrowings is logical and commercially appropriate behaviour. It could also have an adverse effect on banks, already stretched by the unprecedented requests for new lending from salaried members.

The Lawyer reported this month that the UK’s leading banks were struggling to cope with the demand for new loans from fixed-share partners (FSPs) in the run-up to tax law changes on 6 April (18 February 2014).

Several sources suggest that banks have already been discussing lending to partners on the condition that their firms reduce their financial exposure.

“If the banks are putting strings on the way that the money they lend can be used that might cause problems for firms,” says Bull.

“Our view is that [HMRC’s condition] would be counterproductive as it potentially puts the banks into a position of greater exposure (as by definition they will have to lend more overall to the profession) or risks firms being unable to get further funding for capital (if the bank doesn’t agree to increase their overall lending) despite there being perfectly good commercial reasons for them wanting to do so,” said Peter Gamson, head of the professional practices assurance) team at Grant Thornton. “I would hope for further clarification from HMRC on this point.”

Elsewhere in its new guidance, HMRC has offered a slight relaxation of the rules relating to condition C, which focuses on the level of capital a partner has injected into their firm.

Over the past few weeks a growing number of firms including Trowers & Hamlins (10 February 2014), TLT (10 February 2014) and Hill Dickinson (19 February 2014) have begun consulting their salaried partners over a potential capital call.

The new guidance states that so long as a commitment to contribute capital within three months has been put in place by 6 April, and that the funds are paid by 5 July, that will be taken into account by the Revenue. 

The delayed update, which had been expected at the beginning of last week, also clarified the statutory definition of a disguised salary, covered by condition A. HMRC said this would equate to a partner whose fixed remuneration was at least 80 per cent of the whole.

This replaces the previous guidance, which had been criticised as unspecific, which described the levels of salary as “wholly and substantially” fixed.