UK: Further Proposed Changes to the Tax Treatment of Partnerships and LLPs
19 December 2013
Posted by: Author: Robert Gaut & Sarah Gabbai
Author: Robert Gaut & Sarah Gabbai (Fried Frank Harris Shriver & Jacobson LLP)
The UK Government issued draft clauses for Finance Bill 2014 on 10 December 2013. These included details of further changes to the UK tax treatment of partners in partnerships and members of UK limited liability partnerships ("LLPs”), following on from a consultation process earlier in 2013 (for details please see our previous Memoranda of 21 October 2013 and 6 December 2013).
The following is a very brief summary of the main points. There is substantial further detail in the draft legislation, so please contact us if you would like further guidance.
1. Disguised Employment
The new rules propose that, with effect the 2014/15 tax year (commencing 6 April 2014), any member of a UK limited liability partnership ("LLP”) who meets certain conditions will be treated for tax purposes as an employee, meaning that PAYE (employment income tax witholding) will have to be operated, benefits in kind will be taxable and up to 13.8% national insurance will need to be accounted for by the LLP on the remuneration of that member.
The member of a LLP will have to meet three conditions to be treated as a deemed employee:
Condition A is that he or she is remunerated for his or her services wholly or substantially wholly through "disguised salary” (fixed amounts and variable sums or bonuses which are not based on the profit or loss of the business as a whole). In other words, the member is paid for services without reference to the overall profitably of the firm. HM Revenue & Customs guidance states that Condition A will be considered to be met if 80% or more of the amounts payable to the individual for services to the LLP are expected to be in the form of a disguised salary.
Condition B is that the individual member does not have a significant influence over the affairs of the LLP (likely to be the case for most members of large professional partnerships).
Condition C is that the member has contributed by way of capital less than 25% of the "disguised salary”it is expected will be paid to that member for that tax year.
As might be expected, there are anti-avoidance rules in the draft legislation.
2. Alternative Investment Fund Managers and Deferred Remuneration
Further new rules will be introduced to address the timing issues that will arise for UK partnerships or limited liability partnerships that are subject to the Alternative Investment Fund Managers Directive ("AIFMD”) remuneration provisions ("AIFM partnerships”). These rules will also be introduced for the 2014/15 tax year onwards.
The rules will allow an affected partner of an AIFM partnership to allocate certain "restricted” profits to the partnership for UK tax purposes, taking that amount out of the partner’s taxable income for the time being. These are profits that represent variable remuneration under the AIFMD. In particular:
- deferred remuneration (including deferred remuneration which, if it vests in the partner, will vest in the form of instruments); and
- upfront remuneration which vests in the partner in the form of instruments with a retention period of at least 6 months, other than upfront profits that are received in cash.
The legislation will impose a charge to tax on these profits, if reallocated to the partnership, at the additional rate of tax (currently 45%) to be paid by the AIFM partnership itself.
The balance of the variable profit (i.e. after tax has been paid) will be retained until a particular point (the "vesting date"). If the restricted profits vest in the partner who originally allocated them to the partnership, this individual will be able to claim a tax credit against the tax paid upfront by the partnership. The individual can then set the credit against his or her tax liabilities or obtain a repayment of the tax, depending on his or her circumstances at the time of vesting.
The upfront charge on the partnership applies only to income tax. No national insurance charge ("NICs”) will arise until the time when the remuneration vests in the individual partner. Separate guidance on NICs is expected.
This article first appeared on lexology.com.