New partnership tax rules could squeeze profits

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Accountancy firms will need to review their partnership structures to prepare for new rules designed to stop employees in limited liability partnerships pretending that they are self employed to avoid tax.

Junior partners are most vulnerable to having their self-employment status removed, which could increase costs and reduce profits for partnerships.

Draft legislation in the 2014 Finance Bill, published earlier on Tuesday, will remove the automatic presumption of self-employment for partners in limited liability partnerships (LLPs).

The measure to prevent “disguised employment” was first aired in the 2012 Budget and received a negative response from tax advisers during  consultation this year. But that had little effect on the final legislation, which HMRC predicts will raise just over £3bn in tax by 2018-19. Some tax experts were surprised that the detailed legislation was tougher than expected.

The new rules will...

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Comments
johngroganjga's picture

How does being self-employed

johngroganjga | | Permalink

How does being self-employed "avoid" tax?  The only lightening of the burden is the removal of the "necessarily" in the expenses claim rules.  But if they are to all intents and purposes employees in substance anyway their "employer" will be paying all the expenses!

Employer's NIC John

MJShone | | Permalink

It's the extra 13.8% NIC that makes the difference

I don't like    1 thanks

dropoutguy | | Permalink

the use of that word "pretend".

It's inaccurate because limited liability partners were regarded as self employed under the law.

OK that's going to change, but let's not imply they were doing wrong.  What is this? The Guardian?

 

 

johngroganjga's picture

NIC    1 thanks

johngroganjga | | Permalink

MJShone wrote:

It's the extra 13.8% NIC that makes the difference

Yes of course I agree about NIC.  But headline says employees are avoiding tax.  If that's what they meant they should have said employers are avoiding NI.

Sorry John - I was being thick!

MJShone | | Permalink

Read it quickly and took your comment at face value.

 

 

bookmarklee's picture

Going back...

bookmarklee | | Permalink

Let's go back to when LLPs were introduced (in response to large law firm and accountancy firms' seeking a way to secure a form of limited liability without incorporating as limited companies). 

I don't think anyone knows why the LLP Act introduced a provision that said, effectively, if you are a member (partner) of the LLP then you cannot also be an employee. As a result many firms took the opportunity to 'promote' senior staff to 'member status' so as to save the 13.8% Ers NICs.

I am unsure whether such junior partners/members will have retained their employment rights on becoming members of the LLP. If memory serves it was quite possible to be an employee in law but a member of the LLP and thus taxable as such (with no Ers NIC payable)

I suspect that many LLP structures for other businesses then took advantage of this anomoly too.

This change makes the rules clearer as to who will be taxed as partners/members than previously. Firms will have to be very clear when promoting senior staff that they really will be involved as partners and not simply in name only.

If the pay of junior partners/members is recategorised as salaries in the LLP accounts, rather than as a share of profits, we could see reported reductions in firms' accounting profits next year.

 

excelaccountz's picture

Llp self employment

excelaccountz | | Permalink

If IR35 was introduced to catch people setting up ltd companies to avoid paying tax & nic as an employee, then why not for for LLP?

bookmarklee's picture

That is indeed what these rules achieve

bookmarklee | | Permalink

.

Junior partners

Montrose | | Permalink

No where does  the draft legislation provide:-

Test 1: at least a quarter of their pay must be dependent on the profit made by their partnership 

What it says-and this is very different from a 25% test - is

"

the'disguised remuneration'

if it is variable, is varied without reference to the overall

amount of the profits or losses of the limited liability

partnership, or

(c) is not, in practice, affected by the overall amount of those

profits or losses.

 

Ni is now primarily a tax

the_Poacher | | Permalink

NI is now primarily a tax on middle income earners. Successive governments have eroded the contributory principle so much that it's barely visible.

Employment Tax

Ian McTernan CTA | | Permalink

It's high time HMRC admit that charging companies 13.8% of their employees' salaries for the privilege of employing them distorts the market completely as well as discouraging firms from taking on more employees.

They need to scrap NIC- anyone who still calls these 'contributions' is so far detached from reality they need to be committed.

How about they scrap the employer's charge, but with the proviso that employers MUST pass this amount on to their employees straight into their pay packets.  This would then yield more tax and employee's NIC (until we get around to scrapping the employee NIC, which is just another tax) to partially offset the cost, as well as boosting spending.  Net cost to employers would be NIL.

Then we can work on removing other forms of NIC including employee's NIC, then many of the artificial structures put in place to shift people from employee to self employed/ltd company/partner status would cease to be either needed or tax efficient.

New LLP rules

adambl | | Permalink

 

How will these changes impact on LLP's where they are structured to remunerate business owners on a self employed basis up to the 40% level and the balance of profits to a ltd co which is also one of the partners of the LLP?

 

Corporate Members

danmould | | Permalink

The article says the legislation will also apply to mixed member partnerships, what about LLPs which only have companies as their members?

Is there any changes in legislation which says that this isnt allowed?

surely

The Black Knight | | Permalink

Surely it depended on whether you were a salaried partner or a an equity partner. As to your status.

Many salaried partners (in a normal partnership) were unaware that they had all the risks but none of the rewards, or that they should be taxed and NICed as an employee.

20% not 25%

DavidW878 | | Permalink

The article recites that Test 1is that at least a quarter of their pay must be dependent on the profit made by their partnership.   The reference to "a quarter" is incorrect.

In fact the requirement is that the profit share must not be "wholly or substantially" disguised salary (which would include a fixed guaranteed amount).  HMRC have confirmed that they regard "wholly or substantially" as meaning "80% or more" - hence if more than 20% of total profit share is something other than "disguised salary" the new rules will not affect the partner.   Arithmetically, this means that the partner is OK if his "genuine profit share" exceeds 25% of his fixed entitlement: I suspect that that is where the confusion between 20% and 25% has arisen.

Is it likely to be adequately policed?

Jekyll and Hyde | | Permalink

Is it going to be adequately policed and applied in the majority of cases or is it going to be similar to the IR35 legislation that almost everyone ignores, tries to get around and take out insurance to protect themselves against.

If it is going to be like the IR35 legislation and subjective, and not adequately policed by HMRC then I see this new legislation as a waste of time and resources for everyone. All that will happen is that the prudent tax payers will be penalised and the risk takers will carry on regardless. This only creates a unfair tax system.

I am not convinced this new rule will change much.

 

NO    1 thanks

The Black Knight | | Permalink

Jekyll and Hyde wrote:

Is it going to be adequately policed and applied in the majority of cases or is it going to be similar to the IR35 legislation that almost everyone ignores, tries to get around and take out insurance to protect themselves against.

If it is going to be like the IR35 legislation and subjective, and not adequately policed by HMRC then I see this new legislation as a waste of time and resources for everyone. All that will happen is that the prudent tax payers will be penalised and the risk takers will carry on regardless. This only creates a unfair tax system.

I am not convinced this new rule will change much.

 

I think NO is a given.

No one need worry about this legislation and perhaps ignorance is indeed bliss.

You would be lucky to find an inspector that has any clue about tax at all judging from the ridiculous questions we have had in enquiries recently.

And it does indeed create an unfair tax system.

Limited Partnerships

johnruis | | Permalink

Is it clear that the rules will also apply to Limited Partnerships? I have clients whose other halves work in the healthcare industry under one of these arrangements, which to me seem designed to get round the minimum wage and other normal benefits such as holiday pay and sick pay. . They are also used in some specialist circumstances where "employment" status affects the need to be VAT registered.

Limited partnerships

DavidW878 | | Permalink

The "salaried members" rules are specific to LLPs.  The "mixed partnership" rules apply to all partnerships.

P11D

wmark3000 | | Permalink

It's also the loss of treatment of benefits in kind. Self-employed pay no P11D on cars for example.

vowlesj's picture

badly!

vowlesj | | Permalink

@adambl.  One of the changes is to try and avoid the situation you describe from happening.  If you haven't already, review your tax planning with someone who understands the rules.

NIC a tax    1 thanks

ted.henderson | | Permalink

NIC is a tax. Indeed it is a direct tax

At least our Chancellor thinks so, and I agree with him.

"Income tax and National Insurance should be merged in a "historic step" to simplify tax, Chancellor George Osborne has said.

Work to bring the two taxes together would take many years and start with widespread consultation, Mr Osborne said in his Budget speech."