Trowers & Hamlins and Kennedys have become the latest top 100 firms to launch consultations with their partners over their response to HM Revenue & Customs’ (HMRC) proposed changes to the partnership tax regime.
The new rules seek to clarify the definition of LLP membership by determining whether fixed-share or salaried partners should be classified as employees for tax purposes. The taxman is also aiming to clamp down on the tax benefits of so-called ’disguised salary’ (17 December 2013).
Trowers’ senior partner Jennie Gubbins revealed that she wrote to all of the firm’s so-called ‘participating partners’ before Christmas and held two meetings with them last week.
Gubbins said that one route the firm was considering to address the changes was to ask its participating partners, effectively salaried members with on average have £20,000 of capital in Trowers, to inject more capital into the firm.
HMRC’s new tests of employee status for current partners include the level of their variable profit share; their influence on management decisions; and the amount of capital they invest. Failing the latter test, condition C, could show that these partners are not employees, freeing firms from the obligation to pay employers’ national insurance contributions (NIC).
“The majority of them will currently pass the test [condition C] and we are therefore consulting with them about increasing the amount of contribution,” Gubbins said. “We are financially solvent, we have cash in the bank, we are cash positive and have no overdraft, and therefore they and our bankers seem pretty happy with that idea.”
Gubbins added that with Trowers’ financial year ending in March, “obviously we need to get it all sorted out before then”.
Trowers has three groups of partner: senior equity, junior equity and participating, with two classes of the latter (level three, or salaried partners who are all international and do not pay UK tax, and level two, whose remuneration is approximately half performance-related and half fixed share).
At Kennedys, senior partner Nick Thomas said the firm was in consultation with its 60 or so B, or fixed-share, equity partners.
“The consultation will include a vote on changes,” said Thomas. “All partners have voting rights and we vote on almost everything, we’re very democratic. The consultation will have to be finished by the end of the month, after which it is a straightforward case of drafting changes to partnership agreement.
”It’s not about ‘oh God, more money’, it’s about ‘ok, I’m taking a slightly bigger risk, so what more information am I entitled to receive so I feel I have control of that risk?’ It shouldn’t be about money if you’re sensible and have an adult conversation about it.”
Thomas said a “much bigger and scarier thing about all this” was the impact of these partners becoming PAYE.
“While they are all partners, we pay the tax together in January, so we pay last year’s tax ahead of the following year, and it’s a massive cash flow issue,” added Thomas. “If the process doesn’t happen then on 6 April, we all start paying tax for them all on top of what they’ve already paid. In one year you’d be looking at twice the tax hit for that year’s budget. That means that you have either borrow or draw less to cover it.”
Other firms who responded to calls on the issue last week include DAC Beachcroft, which said it was unperturbed by the changes as it already treats all of its salaried partners as employees and has always paid their NIC.
Freeth Cartwright CEO Peter Smith said his firm’s current arrangements complied with the changes because its non-equity partners already put in enough capital.
Smith accepted that there may need to be changes in relation to Henmans Freeth and that this was currently being discussed with partners.
Bevan Brittan finance director Chris Ake said the firm had reviewed the new rules with two sets of advisers.
“We’re not affected,” said Ake. “We’ve always taken the correct approach so there are no risks. We’ve been looking at this for a month or two.”
Clarke Willmott chief executive Stephen Rosser added: “We’re considering it but there’s nothing to report yet.”
The new rules seek to clarify the definition of LLP membership by determining whether fixed-share or salaried partners should be classified as employees for tax purposes. The taxman is aiming to clamp down on the tax benefits of so-called ’disguised salary’ with the result that firms could be liable for paying employer’s NIC on formerly self-employed partners (17 December 2013).