The great tax distraction

Firms wrestle with HMRC salaried partner proposals before April deadline

HM Revenue & Customs’ (HMRC) new salaried partner tax proposals have kicked off a raft of tax reviews and consultations at firms as partners attempt to make sense of the legislation before the 6 April deadline.

The proposals leave firms potentially facing a significantly higher wage bill as ranks of salaried partners are reclassified for tax purposes as employees. As a result, firms will need to pay their national insurance contributions (NIC).

DWF and Weightmans are among the firms to have kicked off reviews of their partners’ tax status. Their contrasting comments show that although all partnerships face the same issues, rarely do you find the same response.

DWF asserts that the changes will have little impact because its salaried partners already fail at least two of HMRC’s criteria for employee status: they have variable pay and invested capital.

At Weightmans, however, salaried partners do not pay into the equity and the firm is asking whether this needs to change. 

In neither case has the issue of managerial influence been raised as a potential sticking point, but that may become firms’ biggest headache.

DAC Beachcroft is unperturbed by the changes. In contrast to DWF, it already classes salaried partners as employees and has always paid their NIC.

Senior partner Simon Hodson says the key issue facing firms will be the attitude towards bringing salaried partners into the equity. If there is a notable distinction between the way equity and salaried partners are treated, some leaders may be sceptical about extending the power of the core equity group. 

The alternative would be to stump up the NIC, but at an uncapped rate of 13.8 per cent of earnings this could be a serious blow to some budgets.

Partners have mooted ideas to circumnavigate the changes, from investing on behalf of salaried partners, who would then pay off the loan via interest accrual, to a straightforward cash call.

Whatever solution firms choose, if salaried partners play no practical role in the running of the business, a cynical HMRC may regard these moves as straightforward tax avoidance.

As one partner highlights, all this begs the question – at what stage do you stop trying to design your business around an ever-changing tax regime and focus on running it?