Partnerships and professional practices: major tax changes for LLPs and partnerships

15 January, 2014

Two major changes for LLPs and partnerships are to be brought in on 6 April 2014 [1]. These changes will have a significant impact on professional practices operating as LLPs with salaried or fixed share members and LLPs or partnerships with a mix of corporate and individual members.

 

Salaried or Fixed Share Members

Historically, individual members of LLPs have for tax purposes been presumed to be self-employed. From 6 April this presumption will be removed. Whether or not a member of an LLP will be taxed as an employee will in future depend on:

 

  • to what extent the member’s income from the LLP is tied to the financial performance of the LLP;
  • the degree of influence the member has over the management of the LLP; and
  • the capital contribution made by the member to the LLP.

 

Members who have fixed income from the LLP with less than a 20% profit share element, don’t sit on a management committee or otherwise have significant management control in the LLP and have contributed capital equivalent to less than 25% of their fixed income from the LLP will be at risk of being taxed as an employee.

 

Mixed Memberships

Increasingly partnerships or LLPs have a mix of individual members or partners and corporate members/partners owned by the individual members/partners. Often this is for tax planning purposes. From 6 April HMRC may reallocate profits and losses between the individual member/partners and their corporate members/partners if it considers that the original allocation was made to reduce the individual member’s/partner’s tax liability.

 

Next Steps

LLPs and partnerships need to review their current arrangements to see whether they will be affected by the changes and start considering what steps they can take to reduce their impact. Taking tax advice in this area will be crucial. LLP and partnership agreements will need to be reviewed and varied where appropriate to reflect any necessary changes to members’ statuses and/or required changes to profit and loss allocation.