In spite of a call from the House of Lords last week to delay the measure, the government is pressing ahead with legislation affecting the taxation of limited liability partnerships (LLPs).
The new measures address HMRC’s concerns, first expressed in the 2012 Budget, about “disguised employment”, where tax was being avoided by LLP members who were not in true partners, and should therefore should be taxed as employees.
HMRC documentation (paragraph 1.57 of the overview of legislation) confirmed that Finance Bill 2014 will set out tests to determine whether members of LLPs are partners for tax purposes, or whether they should be taxed through the payroll. Failing the test will bring an individual LLP employee within PAYE, and Class 1 NIC for earnings that would previously have been taxed as a profit share.
After consultation with the profession, HMRC clarified when the rules will apply and gave partners three additional months to prepare their finances - but the legislation is likely to post significan financial and administrative challenges for accountancy firms that converted to LLPs, and junior partners who currently have 80% or more of their remuneration guaranteed.
Rebecca Benneyworth, author of our Budget 2014 impact report for TaxCalc, said that despite the Lords’ late intervention...