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Why does my partner want to break up with me…?

7th Apr 2014
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If it is because you are part of an LLP then they prefer to keep HMRC happy rather than you! From 6th April 2014 there are new rules on the taxation of members of an LLP.

Until the 5 April 2014 all members of an LLP were treated as self employed for tax and national insurance purposes.

New rules from 6 April 2014 will mean that if you answer YES to all three conditions below then HMRC will treat you as an employee for tax purposes.  They will argue that your income is ‘disguised salary’ rather than a share of the partnership profits, and should be taxed under PAYE as a Salaried Member.

Broadly the three conditions are:

Condition A

This looks at how you are rewarded.  Do you receive payments that are guaranteed, fixed sum payments, a bonus based on your personal performance rather than based on practice profitability?  If so the answer would be YES and you could be regarded as a Salaried Member.

If your reward is largely based on the profitability of the partnership then the condition would not be met.

Condition B

This looks at your role within the partnership and whether you have a significant say in the running of the business.

If you do not have a significant influence in the running of the business then you would answer YES and could be regarded as being in receipt of disguised salary.

Significant influence may be easy to establish for smaller family partnerships where it is simple to demonstrate that each partner has an influence on how the business is run. Where this is the case then the condition would not be met.

For larger partnerships, however, it may be that some partners are classed as Salaried Members and some are not.  For example, if a partnership has a management committee, which oversees the running of the business, then it is likely that those partners on the management committee would regarded as having a significant influence on the running of the business. These partners would not satisfy the condition and could answer NO to the condition.

However for those partners not on the management committee they would meet the condition and answer YES and could be regarded as a Salaried Member.

It is important to consider conditions A & B at 6 April 2013 if you are an existing partner or for new partners on the date they join the partnership.

Condition C

This looks at your capital contribution to the partnership, and the risk associated with this. If as a partner you made a capital contribution to the partnership, in accordance with the LLP agreement, of less than 25% of your annual guaranteed income then you may be regarded as Salaried Member, as condition C is met.

As you would expect there are some exceptions and the following would be excluded from the 25% test:

·         Amounts that the partner may have to contribute at a future date.

·         Undrawn profits, unless they have been converted to capital by agreement.

·         Monies held by the partnership for the partners personal tax liability

·         Any capital held to ‘avoid’ the partner being regarded as a Salaried Member.

 This is a brief summary of the new rules, full details can be found at:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/264589/partnerships.pdf

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