LLP tax changes: accountants tell partners to invest more in firms

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Accounting and law firms are asking senior partners to invest at least a quarter of their salary in order to carry on being taxed as self employed.  

The changes are in response to new tax rules for limited liability partnerships which are intended to stop partners pretending that they are self employed to avoid tax.

Partners need to pass at least one of three tax tests to carry on being taxed as self employed.

A partner will be considered an employee for tax purposes if: 80% or more of their pay is guaranteed; the partner does not...

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Too late now for some

The law required members to be obligated to invest more capital in the LLP by 5 April 2014 (if they wanted to meet the 25% test), but gives them an additional 3 months to actually invest that capital.

It is now too late for the current tax year for those members who were not obligated to contribute more capital by 5 April. If they inject more capital by 5 April 2015, they will not be treated as employees for 2015/16.

It is also important to note that the test is based on expected profit share for the year ahead. This is not changed retrospectively if actual profit share turns out to be less than expected, as long as the initial expectation was reasonable.

Malcolm Greenbaum

Director, Greenbaum Training and Consultancy Limited

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