HMRC has recently updated its guidance on the salaried member tax rules. The key consequence is that LLPs which rely on the contribution of capital to be confident that members are not taxed as employees need to review, and potentially change, their approach.
In the simplest terms, the salaried member rules required LLP members to be taxed as employees (under PAYE) unless they had (A) a significant proportion of their remuneration as variable profit share, (B) significant influence over the affairs of the LLP or (C) a substantial capital contribution at risk in the business (at least 25% of annual fixed compensation).
Many will recall that large groups of members contributed capital in response to these changes, especially ‘fixed share’ members who are often unable to meet the requirements in (A) or (B) because their compensation is largely fixed or they do not have any meaningful vote or participation in the governance of the firm.
The revised HMRC guidance qualifies the previous guidance that a genuine, enduring capital contribution which puts that capital at risk, would fall outside the anti-avoidance rules. In addition, a HMRC example indicates that increasing capital as a reaction to an increase in fixed profit share (i.e. to ensure that the 25% is still maintained) is effectively disregarded.
Advice should be sought from a tax adviser on the potential implications for the firm and its LLP members.
While we do not advise on tax, there will be legal and practical implications for firms, which may include the following:
- Firms need to communicate with their LLP members, especially if a response is to be centralised because although the LLP may be affected, individual members are the taxpayers and are responsible for submitting accurate tax returns.
- Firms designing or varying their compensation systems and governance arrangements need to accommodate these changes.
- Firms may need to review (and update?) their systems and working practices. Tax advice from partnership tax specialists will be essential. Robust record keeping is likely to be vital.
- The LLP agreement and new partner deeds of admission may need updating. Are there more fundamental changes needed, such as changes to voting or profit sharing even? With the next phase of promotions for most firms taking effect on 1 May, this is reasonably urgent for new partner admissions.
- Are the firm’s tax reserving and indemnity provisions fit for purpose? If tax risks increase, where will liability fall? These already needed refreshing in light of the basis period reform changes (for firms other than those with a 31 March or 5 April year end), and the need may be greater now.
If firms are now considering a review of their LLP agreement, try our new free, anonymous tool, CheckYourLLPAgreement, to identify if there are other areas that would merit attention.
If you would like to discuss any of these issues, please contact Partners Corinne Staves or Zulon Begum.
