Finance Act 2014 has brought about significant changes to the taxation of partnerships. This is likely to increase the tax liability of partners in a number of key areas.
There is a provision for an individual partner in a Limited Liability Partnership (“LLP”) to be taxed as an employee. This will affect partners who have a fixed profit share or whose profit share varies but not in proportion to the overall profits of the LLP.
To avoid being caught by the new regulations a member of an LLP must ensure one of the following:
- That their profit share is dependent upon the profitability of the whole business
- That they have an influence on the decisions of the LLP
- They have contributed capital equivalent to 25% of their remuneration
The second area which HMRC will attack are “mixed partnerships” i.e. partnerships which include at least one individual and at least one non-individual (usually a company). The new powers allow HMRC to reallocate some of the profits from a corporate partner either to an individual partner – or even someone who is not a partner – but who has provided services to the firm. The amount which can be reallocated is the amount by which the profit exceeds the appropriate notional profit.
The appropriate notional profit is the sum of the notional return on capital – for capital invested and the notional consideration for the services which the corporate partner provides. These profits are allocated to the person who has the power to enjoy those profits.
In order to avoid problems with HMRC then all mixed partnerships need to ensure that the profits allocated to the corporate partner can be justified as being at a commercial rate. Normally HMRC will be looking at a small percentage above the costs – but in many cases a higher figure might be justified if a case is presented. The most difficult issue will be that services provided by the individual who is the partner are considered to be provided by them as a partner and not as the director of the limited company.