Our Government believes that it can recover £300m within two years by redefining the tax status of certain partners as “salaried”. At present all individual members (partners) of Limited Liability Partnerships (LLPs) are taxed as self employed. Accordingly, any regular withdrawals they make from the partnership can be treated as a share of profits rather than a salary and taxed as self employed earnings. The LLPs save the employer’s National Insurance charge which is currently 13.8% of members’ earnings.
HMRC has issued a consultation on its proposals to change the tax treatment of LLP members who it considers to be salaried employees. The change in legislation will likely be effective from 6 April 2014.
Salaried members will be redefined as those:
- Who have no economic risk of loss of capital or repayment of drawings should the LLP make a loss.
- Who are not entitled to a share of profits beyond their fixed income.
- Who are not entitled to a share of surplus assets when the LLP is wound up.
The Government also has “mixed partnerships” in its sights. These are partnership with corporate partners who are included in partnerships to take advantage of the lower corporation tax rates.
Now may be a good time to re-assess tax planning for partnerships and LLPs in light of these proposed changes.