Hogan Lovells has called on its non-equity partner to inject between £60,000 and £100,000 in response to the HM Revenue & Custom’s partnership tax crackdown.
Following new legislation handed down last month the firm has asked around 65 non-equity partners to inject more capital to the firm in a bid to avoid being deemed ‘employees’ by the authority (26 February 2014).
The total investment, expected to be between £3.9m and £6.9m, will save Hogan Lovells having to shell out national insurance payments for the 65 partners deemed to be on ‘disguised’ salaries according to HMRC.
It comes just days before the final deadline of 6 April by which time firms must have confirmed their new arrangements. The revenue handed down its revised guidelines in February, giving the green light to partner cash calls but allowing a three-month grace period for fixed-share partners (FSPs) to come up with the money.
A spokesperson for the firm said: “We are having to act in anticipation of the final rules, which come into effect from 6 April.
“Our approach is to ensure that the terms for non-equity members are fair to both them and the firm and that our non-equity members are treated by HMRC as the partners that they are. The capital itself doesn’t need to be paid until early July.”
The firm is the latest in a long line of firms who have issued cash calls to partners in a bid to fail one of HMRC’s three tests for being defined as an employee.
Weightmans and Addleshaws became the most recent firms to issue cash calls last month. Addleshaw Goddard partners voted in favour of changing the partnership agreement on 20 March (24 March 2014). The firm asked 60 FSPs to make a cash injection of just over 25 per cent of their salary. Weightmans FSPs also voted for a £3.8m cash call to meet HMRC’s demands (24 March 2014).
The previous month, Hill Dickinson consulted on its second cash call in 12 months in response to the changes (19 February 2014), following news that Trowers & Hamlins was also gearing up for a cash call (10 February 2014).
Hogan Lovells’ revenue outside the US dropped from £590.6m to £581.4m over the course of the 2012/13 financial year, according to the firm’s international LLP accounts. However overall profit and profit per equity partner were both up at the firm. It saw a 5.1 per cent increase in net profit, from £192m to £202m and average profit per equity partner also rose from £761,000 to £811,000 between 2011/12 and 2012/13 (30 January 2014).
However even if the firm’s accounts were not rosy, it appears there is little the firm could do with the cash injection.
The HMRC has 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.