More Thoughts About LLP’s

Since the book was published late in 2013, you may be aware that there are changes in the air regarding how LLP’s are taxed. I’ve set out in the Schmidt Tax Report my initial reaction to some proposed new rules which will impact, amongst other things, in the following areas:

• Allocating profits to company members of LLP’s to save tax;
• “Disguising” people who are “really” employees as LLP members, to avoid PAYE and national insurance on their earnings; and
• Artificial loss allocations to individual partners, with the profits going to the companies.

These changes represent a “clamping down” on the use of LLP’s and partnerships to save tax, and therefore, of course, caught our eye as a magazine showing practical ways in which people can arrange their affairs to reduce their taxation liabilities.

Since the 10 December, when most of the proposed new rules (which come in on 6 April 2014) were first announced, we’ve had a chance to consider in a little more depth what their impact will be – always assuming, of course, that they are brought in as worded.

The first thing to say is that this is by no means the death blow to LLP’s as a valid commercial business vehicle. In a surprising number of instances we have seen in real life, where the tax planning arrangements using the LLP are not what you describe in any way as “abusive”, the LLP structure is likely to continue, albeit with its wings clipped to a greater or lesser extent in terms of the amount of tax it saves.

In some instances, particularly in the example of investment LLP’s where the company member has contributed capital, the tax may not be changed at all. This isn’t the target HMRC are aiming at.
With regard to the “disguised employment” strand of the proposals, they don’t hit individuals who are “really” partners in the business, it seems to us, and this is quite reasonable and right.

However, there are some situations where individuals have been made LLP members with no thought of saving national insurance at all (for example junior partners in some professional firms) where the rules might actually trigger a careful review on how they should be treated.

Particularly interestingly, in this context, it seems that individuals who are LLP members but who will be treated as employees for tax purposes as from 2014 – that is, those who are not “really” partners in the business in any sense – will only be treated an employees for tax purposes. We can see nothing in the new rules which gives them any of the rights that employees enjoy under employment law.

Interesting…