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Proposed Changes to the Taxation of UK Partnerships
6 January 2014
In May 2013, HM Revenue & Customs (“HMRC”) published a consultation document looking at various aspects of partnership taxation. As a result of this consultation process, the UK government announced two main anti-avoidance provisions in its Autumn Statement last month. The first deals with the taxation of salaried LLP members and the second with the allocation of profits in partnerships with a mix of individual and non-individual members. On 10 December 2013, the UK government published draft legislation, together with a technical guidance note drafted by HMRC setting out the government’s opening gambit and HMRC’s interpretation of the legislation.
The first provision announced provides that a member of an LLP will be treated as an employee rather than a partner for tax purposes (the most immediate cost of which would normally be the employer’s national insurance contributions for the LLP in relation to the deemed employee’s profit share). This tax treatment will apply if three conditions are satisfied: (a) that a member provides services to an LLP and receives payment that is wholly, or substantially wholly (more than 80%) a “disguised salary”; (b) that a member does not exercise significant influence over the LLP; and (c) that the member has not made sufficient capital contributions to the LLP.
The second set of anti-avoidance legislation concerns the allocation of profits (and losses) to partners in partnerships containing a mixture of individual and non-individual partners. The government’s concern is that individuals are routing profit allocations through corporate vehicles to obtain the benefit of the lower, corporation tax rates. The provisions aim to fix this perceived abuse by reallocating profits back to the relevant individual.
There are significant uncertainties surrounding the application of the draft legislation and guidance that has been published. Debevoise & Plimpton LLP, together with many other legal and accounting firms will be making representations to HMRC regarding the drafting that has been proposed. We expect that there will be changes in the proposed drafting, in particular regarding the “disguised salary” provisions but also regarding the interaction between transfer pricing considerations and the mixed membership rules. Therefore, we do not recommend making any immediate changes to partnership structures. However, now may be a good time to start taking stock of arrangements that are in place.
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