Partnerships have long been an attractive structure for people running small businesses. They’ve been particularly favoured by owners of professional practices – from solicitors and accountants through to architects and dentists. The fluidity of the arrangement allows partners to change with few tax implications – something that becomes more problematic within the confines of the traditional limited company. From 6th April 2014, new legislation came into effect which has led many businesses to think again about their partnership status.
The first issue concerns the use of ‘corporate’ partners as a way of managing the tax affairs of the partnership. Given that the corporation tax rate is significantly lower than higher-rate income tax, it made sense to have a company around the boardroom table – helping to manage cashflow and allowing some profit to be taxed at 20%, until such time as it was taken by the individual partners. HMRC perceived this to be a loophole and it’s now no longer an option for either partnerships or LLPs.
The second new regulation applies to LLPs specifically and it concerns the status of the partners themselves. Since the LLP vehicle was first introduced back at the turn of the century, partners have tended to classify themselves as self-employed. Now, this is much more difficult for those with a fixed share of profit. The Revenue expects them to go on the payroll and account for tax under PAYE.
Unless you’re able to demonstrate clearly that you have sizeable influence in the business, have invested capital or there’s a significant variable element to your remuneration based on the overall profitability of the business, then it’s no longer possible to claim self-employment. Although the motives of HMRC are clear enough – to clamp down on more extreme cases of tax avoidance – many observers feel that a sledgehammer is being used to crack the proverbial nut.
The ‘double whammy’ of these two changes is serious enough to prompt a number of LLPs to consider whether they’d, in fact, be better placed as a limited company. If it’s an issue that’s concerning you right now, the first port of call should be your professional accountancy advisers. They’ll be able to give you more detailed advice, assess your options and come up with the solution that’s most appropriate to your particular circumstance.
If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at firstname.lastname@example.org