Nabarro partners are to vote in March on a cash call to its fixed-share partners in order to meet new tax rules for LLPs handed down by the HMRC.
The firm is planning to ask its fixed-share partners (FSPs) to contribute more than 25 per cent of their salary in order to avoid being classed as employees by HMRC. This is likely to result in a cash injection of under £1m for the firm.
Managing partner Andrew Inkester called an all-partner vote to cement the new definition of FSPs, which make up approximately 35 per cent of Nabarro’s partnership, in the partnership agreement.
HMRC’s new rules are part of a crackdown on tax avoidance generally and a specific target on LLPs avoiding paying national insurance contributions (NICs) on ‘self employed’ partners with so-called ’disguised salaries’ (17 December 2013). New guidance on the rules was published last Friday (21 February 2014).
A capital injection is a method of failing one of three tests aimed at determining whether or not an individual is an employee or an owner of the business. If firms fail at least one of the tests they can avoid paying NICs for swathes of the partnership (20 January 2014).
Nabarro must ask FSPs for more than 25 per cent of the “disguised” element of their salary in order to avoid paying a hefty sum in tax for around 100 of its members.
The other two tests concern the amount of a partner’s salary that is dependent on the profits of the firm and the amount of influence the partner has in the firm. Nabarro partners could potentially fail two of the tests after deciding to boost partners’ influence in the firm in line with their capital contributions.
Following an all-partner vote on the new partnership agreement this month, FSP votes will increase with their increased contributions. Currently partners have a share of votes proportionate with their variable fixed share. Those votes will now increase in line with the cash injection entered by those partners.
However some votes, such as the senior partner election, will continue to be ‘one man, one vote’, according to Inkester.
HMRC said it was pushing ahead with the changes on Friday (21 February 2014) but agreed to give firms issuing cash calls an extra three months to come up with the capital as long as there was a “firm commitment” in place.
Condition C in the new rules states “for individuals who are members at 6 April 2014 a firm commitment in place by 6 April 2014 to contribute capital within three months will be taken into account”.
But the Revenue warned that anti-avoidance measures will be triggered if firms use the fresh capital to pay off other debts. It stated: “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.”
The changes are set to put pressure on banks, which are un-used to the volume of new loan requests from partners in such a short time period (18 February 2014).
Inkester said: ”The two time-critical matters in our case have been changing the members agreement and you need some lead time to get the banks warmed up, because half the firms in London are doing this.”
Nabarro is the latest in a growing line of firms considering cash calls following news that TLT (10 February 2014), Trowers (10 February 2014) and Hill Dickinson have all decided on that path (19 February 2014).
Hill Dickinson is consulting on its second cash call in 12 months. 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.