I have an LLP Client which has a structure of four Ltd Co Partners and no individual partners. The four companies are used only for the purpose of collecting their share of partnership income and pay a salary of £7600 to the sole Director, drawing the remaining profit as dividends as the only shareholder. Given the changes announced in December (affective April 14) regarding the criteria for reclassifying partners who may be deemed to be 'salaried' as employees can anyone help with an opinion on how corporate partners as in this case may be impacted. I believe not but would welcome others professional opinion.
Some further relevant background -
In April 12 the then four individual members processed the 'sale' of their individual share in the LLP to their newly formed respective Ltd Companies. The valuation was approved by HMRC following negotiations on the basis that the partnership had two equity owners and two non-equity. The partnership agreement states the profit will be apportioned either on the basis of work undertaken (contribution to business as the default) or on a profit percentage linked to client income streams. The equity partners review annually to determine if the method of apportionment is considered fair. No partner receives a fixed annual income - all receive a standard monthly profit distribution for personal cash flow purposes (via their Ltd Cos) when Partnership cash flow permits and the final profit apportionment is concluded when a full set of accounts are completed and an analysis of all jobs performed. Two members founded the business and won the major contracts which produce the majority of income (although no capital input was required) and retain 100% of the equity for the practice whereas the other partners joined later and equally did not put in any capital.
HMRC could have issue with the method of income extraction from their respective Ltd Companies but they are acting legally in the same way as thousands other similar structures operate and in my opinion any HMRC challenge to this aspect would be separate to the change in legislation from Partnerships.. Again any other opinions gratefully received.
Replies (8)
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Issues
The two non equity partners may be vulnerable to the salaried partner rules. Whether their profit shares are linked to the profits of the business as a whole is not clear from your comments.
Of probably more concern are the mixed partnership rules. These may bite on all the partners. See the draft ITTOIA 2005 s850D.
Mixed partnership?
Graham, my reading of the OP is that all of the partners are already limited companies.
My reading of the new legislation is that for the mixed partnership rules to apply, there must be a mix of individual and non-individual members.
Equally, the disguised employee rules only apply where the member concerned is an individual.
I can't see any issued if all of the LLP members were limited companies by 5 December 2012?
I presume that it's the limited companies of the former equity partners that are now the equity partners in the LLP?
S850D
Take a look at the draft s850D as I suggest. This applies where the individuals are not partners themselves. What is uncertain is whether this can apply to partnerships of companies set up before 5 December. Some say it doesn't but I remain uncertain on the point.
5 December is the correct date.
See https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/263623/Partnerships.pdf
Thanks Graham
I struggled with S. 850D(1)(d) for a while, and S. 850D(8)-(10) led me to believe that it would only catch the position where one partnership was a partner in another.
I see your point though, that it can apply where the only members are companies (controlled by individuals who might otherwise be partners).
I do read into S. 850D(1)(d) that the individuals not being partners must result from attempting to avoid S. 850C. If the partners are all corporates before 5 December 2012, there can not have been any attempt to avoid S. 850C, since it didn't exist when the change was made. Does that make any sense?
If the firm is merely a cost-sharing conduit whereby services are rendered to end clients (invoiced through the conduit, with resultant sharing of profits), could it also be argued that the requirements that S. 850D(1)(a) aren't met? That the services aren't performed for the firm, but for the end clients?
@ MaryFranks Is it important that the main business operates through a partnership? I've seen a structure using a company, where the "profit shares" were extracted by the individuals' companies invoicing a "conduit" company that carried on the business.
HMRC tried, but failed, to attack it, although I'm not sure how it would now sit with the agency/intermediaries legislation that's also subject to current/recent revision.
It's possibly down to the same arguments though.
The only other option then would be a joint venture arrangement.
Steve
The logic expressed in your third paragraph is the basis for the argument that the new rules do not apply to pre-existing partnerships. The more I read it the more I am inclined to your view but I am aware that there are opposite views in at least one big firm (although I understand that this opinion is not shared by all experts within that firm)
I am unconvinced by the argument in your fourth paragraph. If the firm is invoicing the end client I cannot see that the individual is performing his services for anyone other than the firm. There is presumably no contractual relationship between the individual and the end user.
A further interesting question is that, if one leaves a corporate partnership in existence on the assumption that the new rules do not apply, but that assumption proves to be wrong, should we be putting agreements in place between the individuals and their companies to allow the individuals to extract the profits from the companies? In absence of such agreements, it would appear that the relieving provision in s850E cannot apply and therefore there is the potential for double taxation!
Don't you love tax!!!
You may want...
... to suggest that further advice be taken over the structure. However there are a few points that I'd make:
Given that EU procurement rules appear to apply to the contact, you're likely to find that if you want the contract in a different entity, it will have to be re-tendered, with the possibility that it might then be lost.
The viable alternatives to the LLP aren't without issues, most notably IR35 or the agencies legislation in relation to the profit shares passing to the 10% non-equity partners, or, in an alternative structure, employment-related securities issues.
If the LLP is retained, the current set up is as optimal as it's possible to be, given that:
it's not clear whether S. 850D is intended to apply to partnerships comprised only of companies at all. That certainly wasn't a mischief with which the consulation documentation appeared to be concerned.the arrangement was already in place at 5 December (but not Graham's comments that there are that question that interpretation).there are other arguments that S. 850D should not apply, not least the commercial efficacy that the structure affords the partners, with respect to going their separate ways with personal service companies if they wish, when the current contract ends.
If it is retained though, Graham's point over the agreements referred to in S. 850E should be borne in mind. I'm still trying to get my head around the legislation, and so I bow to greater wisdom.