Key points: Salaried Members of LLPs One Month to Tax Deadline

Transcription

1 Salaried Members f LLPs One Mnth t Tax Deadline HMRC has issued updated guidance n the new tax rules fr salaried members f limited liability partnerships (LLPs) that will apply frm 6 April As we have been reprting since March last year, the changes will have a significant impact n cnstructin prfessinals perating as LLPs. Intrductin At present, a member f an LLP is treated as being a self-emplyed, rather than an emplyee f the LLP, fr the purpses f tax and natinal insurance cntributins (NIC). A member is liable t incme tax thrugh their self assessment tax return n their share f the LLP s prfits. The member pays a lwer rate f NIC and the LLP is nt liable t pay any emplyer s NIC (currently 13.8%). HMRC s new rules mean that a salaried member will frm 6 April 2014 be treated as an emplyee f the LLP fr incme tax and NIC. Actin t be taken LLPs shuld review their LLP agreements and cnsider whether any members will be affected by the new rules. If they are, then they shuld cnsider restructuring befre 6 April All three f the cnditins set ut belw need t be satisfied fr the rules t apply, s it is nly necessary t fail ne f the cnditins. Frm 6 April 2014, "salaried members" will be treated as emplyees f the LLP fr incme tax and natinal insurance. LLPs shuld review their LLP agreements nw and cnsider whether any members are affected by the new rules. If they are, then it shuld be pssible t restructure befre 6 April. The main ptins fr reducing the risk f a member being classed as a "salaried member" are: Key pints: Cnditin A (Disguised Salary) - Increase the member's share f the prfits f the LLP as a whle t at least 20% f their remuneratin; r Cnditin C (Capital Cntributin) - Ensure the member cntributes capital f 25% r mre f their fixed share entitlement. The capital cntributin can be funded by way f a bank lan. It is unlikely that an LLP will suddenly want t grant a member significant influence ver the affairs f the LLP (Cnditin B) and s the main ptins are: Cnditin A (Disguised Salary) Increase the affected member s share f the prfits f the LLP as a whle t at least 20% f their remuneratin. Cnditin C (Capital Cntributin) Ensure the member cntributes capital f 25% r mre f their fixed share entitlement. It is pssible t fund the capital cntributin by way f a lan, subject t the lan cming frm certain third parties (e.g. a bank) and it being a full recurse lan. Salaried Members The new rules will treat an individual member f an LLP as an emplyee fr tax purpses if all the fllwing cnditins are met: Cnditin A Disguised Salary HMRC state this is the key indicatr fr determining if an LLP member is a salaried member. The test is applied lking frward n the basis f the arrangement in frce at the time that it is being determined whether the cnditin is met. T view HMRC s updated guidance n the new tax rules fr salaried members f LLPs please click n the link belw: HMRC Updated guidance Lndn Bristl Dublin

2 The cnditin is met if there are arrangements in place under which the member perfrms services fr the LLP and it is reasnable t expect that the amunts payable by the LLP will be whlly, r substantially whlly, disguised salary. The updated guidance makes it clear that whlly and substantially shuld be read as at least 80% f the amunts payable. Disguised salary is an amunt that meets any f the fllwing requirements: It is fixed; r It is variable, but varied withut reference t the verall amunt f the prfits r lsses f the LLP; r It is nt, in practice, affected by the verall prfits r lsses f the LLP. Cnditin B Significant Influence This cnditin is met if the mutual rights and duties f the members and the LLP d nt give the member significant influence ver the affairs f the LLP i.e. thse that merely wrk in the business rather than carry it n. If an LLP delegates management t a grup f members e.g. a management cmmittee that effectively run the LLP, the cnditin will nt be satisfied in respect f the members f the management cmmittee but is likely t fr the ther members. HMRC s revised guidance states that examples f thse wh d have significant influence include thse wh are invlved in the management f the business as a whle, r senir members f a firm wh may have little interest in day-t-day management which they leave t thers but their rles and rights mean they can exert significant influence ver the business as a whle. Cnditin C Capital Cntributin The cnditin is met if the member s cntributin t the LLP is less than 25% f the disguised salary in the tax year in which it is being determined whether the member is an emplyee. The fllwing amunts shuld nt be included in the calculatin f a member s capital cntributin: Amunts that the member may be called n t pay in the future; Undrawn prfits (unless they have been cnverted int capital); r Amunts held by the LLP fr the member e.g. sums held in a taxatin accunt. Fr individuals wh are members f the LLP at 6 April 2014, a firm cmmitment in place by 5 April 2014 t cntribute capital within three mnths will be taken int accunt in determining whether the cnditin is met. Where an individual becmes a member n r after 6 April, a twmnth perid will be allwed t prvide capital, again subject t there being a firm cmmitment t cntribute the capital frm the day f becming a member. Lndn Bristl Dublin

3 Frequently Asked Questins Here are sme frequently asked questins arising frm HMRC s revised guidance: 1. What apprach will HMRC take t the cnditins? HMRC state that they will take a cmmn sense apprach t applying the cnditins. Sme f the cnditins will be mre, r less, apprpriate fr particular LLPs. Only if all three cnditins are met will the individual be treated as a salaried member, with incme and NIC treatment applying as fr ther emplyees. 2. Can HMRC revisit the LLP s applicatin f the test? HMRC emphasised that the test is a prspective ne: Prvided that the test is applied reasnably, the test is nt revisited with the benefit f hindsight if it is fund that any f the assumptins were incrrect. 3. Might the implementatin f the changes be delayed beynd 6 April 2014? N. HMRC has made it clear that the implementatin date is 6 April It is expected that the Finance Bill will be granted Ryal Assent in early July and that the legislatin will take retrspective effect frm 6 April Can we put in place arrangements t put members utside the scpe f the salaried member rules? Anti-avidance legislatin will be brught in which is intended t prevent the use f artificial structures r arrangements t put members utside the scpe f the salaried member rules. Hwever, it will nt be avidance if the terms under which an individual is a member change and they becme a member n genuine terms cmparable t a partner in a traditinal partnership. Anti-avidance legislatin will be brught in which is intended t prevent the use f artificial structures r arrangements t put members utside the scpe f the salaried member rules. HMRC will nt cnsider that genuine and lng-term restructuring that causes an individual t fail ne r mre f the cnditins t be cntrary t the legislatin. 5. Is it pssible t get clearance f ur restructuring prpsals frm HMRC? N. The legislatin will apply frm 6 April 2014, but yu will be unable t btain a frmal clearance frm HMRC n the applicatin f the rules using the nn-statutry business clearance prcedure until the legislatin receives Ryal Assent (expected in early July). 6. What cnstitutes disguised salary? Disguised salary culd include, amngst ther payments: Fixed sums e.g. salaries; Payments n a piece wrk basis e.g. by the number f units prduced r jbs dne; Bnuses based n the member s persnal perfrmance withut reference t the success f the business; Guaranteed prfits; r Nn-refundable drawings if repayment is theretical nly unlikely. Lndn Bristl Dublin

4 7. Are payments made n accunt f an expected prfit share classed as disguised salary? N. These sums are nly cntingently paid and will later be tallied with actual prfits s as t give rise either t a right t further prfit r a debt wed t the firm. In such a case, the reward fr services is a prfit share with the drawings being the means by which the prfit is accessed. 8. D we have t have made the capital cntributin by 5 April 2014? N. Existing members have an extra three mnths (i.e. until 5 July 2014) t cme up with the capital s lng as there is a firm cmmitment in place t cntribute capital at 5 April Thse becming members n r after 6 April will have tw mnths. 9. Can a member s capital cntributin be btained thrugh a lan frm a third party? Yes. HMRC will accept a genuine cntributin by the member t the LLP, which is intended t be enduring and give rise t real risk. Such a cntributin may be btained thrugh a lan frm a bank. The firm might itself arrange the lan thrugh a partnership facility. Prvided that the debt will then be that f the individual member, this will be acceptable. HMRC will cnsider that such a cntributin will nt be acceptable if: It derives frm a nn-recurse r limited recurse lan; The funds derive frm the firm itself e.g. this is made f a lan frm the LLP t the individual r frm a bank as part f an arrangement where there is t be a reductin in the firm s indebtedness t the bank; The LLP lans the mney back t the member; The firm, rather than the individual member, pays r therwise bears the cst f the interest f the lan; r An individual is t be brught int the LLP fr a fixed term assignment and it is reasnable t assume that the capital cntributin has been made s that the individual fails the test fr the duratin f the assignment. 10. If a member is classed as a salaried member, is the firm liable t perate statutry payments? Yes, as the LLP will be a secndary cntributr fr NIC, they are als respnsible fr the peratin f the regimes relating t statutry payments, statutry maternity pay, statutry sick pay, statutry adptin pay and statutry paternity pay. 11. Des where a member is resident affect whether smene is a salaried member? N. Residence is nt a factr in deciding if smene is a salaried member. 12. Hw d the rules apply where members are rewarded n glbal prfits and nt just UK prfit share? The test is applied t the prfit share frm the UK LLP. It is cmmn fr parallel partnerships t exist in jurisdictins utside the UK, where the Lndn Bristl Dublin

5 laws f the relevant freign jurisdictin will nt permit the LLP t perate there (e.g. the Republic f Ireland). T ensure that prfits can flw between the LLP and freign partnership, there will be at least ne member cmmn t each entity (smetimes referred t as a valve partner ); this member may draw ut prfits frm the freign partnership t tp up the payments t be made t the members f the UK LLP (r may receive additinal amunts frm the UK partnership t tp up the valve partner s prfit share). Amunts received frm the UK LLP will fail Cnditin A if they are variable by reference t the prfits f the UK LLP. Fr further infrmatin please cntact: James Hutchinsn Partner T: +44 (0) E: j.hutchinsn@beale-law.cm 13. Hw is the significant influence cnditin (Cnditin B) applied glbally? The significant influence cnditin, Cnditin B, is applied at the level f the UK LLP. March 2014 Lndn Bristl Dublin