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December 13, 2013

Partnership Tax Treatment - Two Changes Outlined

New Legislation - Salaried Members of LLPs

Draft legislation has now been published to counter perceived avoidance of National Insurance from 6 April 2014.

Current legislation dictates that if an LLP carries on a trade, profession or business with a view to profit then its members are treated as partners.

The new legislation will treat a member as an employee for tax purposes if all of the following conditions are met:-

A - The member performs services for the LLP and it is reasonable to expect that amounts payable to the member are substantially wholly fixed, or if variable, not variable based on the profits and losses of the LLP as a whole.

B - Rights conferred on the member do not give them significant influence over the affairs of the LLP

C - The member has no more than 25% of their salary (defined as "disguised salary") invested in the LLP for the appropriate period.

LLP agreements will need to be considered in detail, on an ongoing basis, in relevant cases and HMRC can be approached to provide their opinion on arrangements that exist.

The rules do not apply to un-incorporated partnerships, presumably because of the inherently higher risk to what might be in essence salaried partners in such organisations.

New Legislation - Mixed Membership Partnerships

New rules are to apply for partnerships (whether LLP or not) that include a member/partner that is a not an individual.  The commencement date is 6 April 2014.

If the member who is not an individual receives a profit share that is in excess of what it would have achieved if the partners were all acting at arms length, then this is counted as "Excess Profit".

The amount of Excess Profit is then be reallocated for tax purposes to an individual who has the "power to enjoy" those profits, indirectly through ownership of the non-individual.

New rules also come in from 6 April 2014 in relation to arrangements that are made primarily for tax purposes, whereby an individual member has a tax loss allocated to them.

HMRC mention a scenario whereby an individual who invests money in a partnership has an arrangement with the other partners that provides him with a material loss, especially in the early years of trading that can be set off against his other income.  In such a case the arrangements may mean that the other partners do not enjoy the benefit of achieving an allocated loss for tax purposes.

In such cases the new draft legislation will seek to deny tax relief to the individual who receives the excess loss.

UPDATE - these rules were incorporated into the Finance Act and so are applicable from 6 April 2014. 

News & Views from PD Tax - December 2013


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