Fladgate has overhauled its partnership structure ahead of the introduction of HMRC’s new rules on the tax treatment of fixed-share partners.
The Covent Garden firm is set to receive a seven-figure windfall from the partnership restructuring. The new arrangements will include an increase in capital contributions from junior partners, who currently inject as little as £2,500, up to a maximum of £50,000.
In return Fladgate’s junior partners are to be given a larger chunk of the equity.
“Our new arrangements, which we believe to be proportionate and effective, will introduce planned shares of profit split between fixed and equity for all levels of partner,” Fladgate chairman Charles Wander said. “We feel that increasing capital contributions should go hand in hand with increasing equity. Why? Because you’re asking partners to make a larger contribution, so it seemed the right thing to do to open up the equity as well.”
Fladgate’s new profit sharing arrangements will take effect on 1 April. The firm’s range of partners will now include those whose remuneration is 90 per cent fixed and have a 10 per cent equity share, through to those on a 75:25 split, up to full share partners.
Capital contributions for fixed-share partners will range from between £30,000 to £50,000, compared with the previous range of £2,500 to £15,000.
Wander said Fladgate had talked to its bank [Barclays] in December and that the funding had been approved at the end of that month. Around 40 partners are understood to be affected at Fladgate, “so we’re sitting on 40 applications for new loans”, said Wander. “As far as we know we’re the first in the queue.”
Last Friday HMRC appeared to give the green light to a wave of capital calls at LLPs across the UK when it issued updated guidance on its national insurance contributions changes (26 February 2014), which were first unveiled last December (17 December 2013). Several 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.
Fladgate kicked off a series of consultations in January, added Wander, who also confirmed the new arrangements were partly driven by HMRC’s tax changes set to be introduced in April.
“Everyone will fail either condition C or A as a result of either their capital contributions or level of floating share,” he commented, referring to the Revenue’s three tests of employee status. “Most will fail C, if they don’t they fail A. Some will fail both.”
The Fladgate chairman said that the firm had not yet decided what it would do with its £1m+ windfall but confirmed that it would not be used to reduce full-share partners’ capital in the business.
“We have no immediate plans but the banks are keen to know if a firm they are about to lend to is stable and keen to grow, and we’re investing heavily in the business with new people,” said Wander. “We are emphatically not going to use the funds to reduce the capital of full sharing partners. Our line to the partners is that it isn’t coming from us, we’re just responding to the ways LLPs now have to be structured.”