Kennedys responds to HMRC with 30 per cent cash call to FSPs

Kennedys has called on its fixed-share partners (FSPs) to top up their capital contributions to 30 per cent of their salaries in response to HM Revenue & Customs’ (HMRC) changes to partnership taxation.

Kennedys was one of the first of the top 100 firms to launch a consultation with its partners in response to HM Revenue & Customs’ (HMRC) proposed changes to the partnership tax regime earlier this year.

Although Kennedys’ FSPs already had some cash invested it was not enough to satisfy HMRC’s minimum of 25 per cent to fail condition C of the employee status test.

The firm entered a consultation with its partners in January, after which it used its existing banking facility to issue the top-up cash call, which affected 60 or so B, or fixed-share, equity partners (13 January 2014).

The new rules sought 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 also aimed to clamp down on the tax benefits of the so-called ’disguised salary’ (17 December 2013).

DWF and Weightmans became the first to confirm that they were consulting with their partners over the new rules in early January (7 January 2014).

HMRC’s 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 consultations were followed by a raft of cash calls at firms that opted to fail condition C by asking their fixed-share members to contribute more capital.

Nabarro kicked off a cash call in March (26 February 2014) following news that TLT (10 February 2014), Trowers & Hamlins (10 February 2014) and Hill Dickinson had all also decided on that path (19 February 2014)

Hogan Lovells called on its non-equity partners to inject between £60,000 and £100,000 in April (3 April 2014) and Eversheds issued a 25 per cent cash call to its 164 fixed-share (9 April 2014).

By mid-February it had become clear that this was the most popular response to the changes as the UK’s leading banks were revealed to be struggling to cope with the demand for new loans from FSPs in the run-up to tax law changes on 6 April (18 February 2014).