Double trouble for partnerships and LLPs

A consultation document has been published by H M Revenue & Customs (HMRC) attacking LLP members whose terms are similar to those of employees and also profit allocation where a partnership has at least one corporate partner. Legislation on suggested changes is intended to be introduced from April 2014.

Statute treats members of LLPs, including those that are salaried, as self-employed whereas HMRC considers that salaried or fixed profit share partners in conventional partnerships are employees, thereby taxing their income via PAYE. An element of risk and flexible profit sharing arrangements are required before partners may be treated as self–employed.

Corporate partners benefit from the lower corporate tax rate in respect of their profit share whilst maintaining the flexibility of a partnership structure. HMRC appreciate that a corporate partner may be appropriate in certain situations although they clearly wish to discourage any benefits being exploited in circumstances where the company makes little contribution and is awarded a significant profit share.

Morag Matthews, Tax Partner at leading Warwickshire accountancy firm Burgis & Bullock considers that corporate partners should have a profit share commensurate with their role however the consultation document could lead to future legislation which may catch genuine commercial arrangements. The consultation will continue until early August.

Burgis & Bullock will be participating in the consultation.

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