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News - 17 March 2014

Changes to the taxation of partnerships.

The Draft Finance Bill 2014 includes a series of changes to the taxation of partnerships.

The changes include a set of rules which applies a punitive tax treatment to individual members of partnerships with mixed membership comprising both individuals and non-individuals (typically, but not necessarily, a company). This could be seen as part of a growing trend in review by HMRC of the taxation of partnerships following on from the announcement in October 2013 restricting the application of UK transfer pricing rules to service companies wholly owned by partnerships.

The major impact, however, will be the way the new rules are applied to those individuals who will continue to be taxed as partners and those individuals who, alternatively, will be taxed as so-called “Salaried Members”. 

The new rules are to take effect from 6 April 2014 and they will apply only to members of an LLP constituted under the Limited Liability Partnerships Act 2000.

Stuart Coleman, Manager of the Tax Department of ABDS comments:
“As a Salaried member of staff, the individual is to be treated, for corporation tax, income tax and NIC purposes, as being employed by the LLP thereby bringing the individual into taxation under ITEPA 2003 in respect of all earnings from that deemed employment. The individual’s earnings would be subject to employer’s and employee’s NICs and, as employer, the LLP would be obliged to operate PAYE thereon. Correspondingly, the LLP would be entitled to a tax deduction for any expenses paid by it in respect of the employment.”

Stuart continues:
“The new legislation overrides ITTOIA 2005 s 863 which treats the activities of a UK LLP as carried on in partnership by its members. For this, three conditions are to be met. If all three conditions are met then the member is a Salaried Member for UK tax purposes.”

The conditions can be summarised as follows:
(a) the member provides services to the LLP and is remunerated for those services to the extent of 80% or more by way of “disguised salary” the quantum of which does not vary by reference to the overall profitability of the LLP; and
(b) the member does not have significant influence over the affairs of the LLP; and
(c) the member’s capital contribution to the LLP is less than 25% of his “disguised salary”.

HMRC’s guidance remains limited in terms of clarification of practical points of implementation should an individual fall within the Salaried Member rules. We at ABDS will keep you informed of any further clarification made by the Government by either updated legislation or guidance notes.

If you need any help and advice on partnership agreements and the subsequent tax liabilities, contact ABDS to discuss how we can help.

ABDS Chartered Certified Accountants of Southampton.
Tel: 023 8083 6900  E-mail: abds@netaccountants.net

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Great with people  
Clear and precise with advice
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In touch with issues that face our clients
Mindful of our client’s long term strategic goals

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