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HM Revenue and Customs publishes guidance on new LLP tax laws

HM Revenue & Customs (HMRC) has published further guidance for Limited Liability Partnerships (LLPs) to help them understand new rules that could increase their tax liabilities.

Under new laws, LLPs and their fixed salary members are taxed as though those members are employees rather than partners, unless the LLP can show the members fail certain tests that would otherwise indicate they are employees.

The 58-page guidance gives practical examples to help LLPs interpret the new rules, including how to ensure their fixed salary members fail the tests and are therefore taxed as partners rather than employees.

One test that will prevent a fixed salary member from being taxed as an employee is if that member has made a significant capital contribution to the LLP. Many LLPs are therefore asking such members to make a capital contribution so they are not taxed as employees. However, organising funding and making the necessary changes to LLP agreements before the introduction date of 6 April 2014 has proved problematic. The guidance makes clear that it is sufficient if, as at 6 April 2014, there is an unconditional requirement for members to contribute capital funding, and that funding is in place within three months.

Recommendations

Download the LLP guidance from the GOV.UK website.
• Having considered the guidance, LLPs should review the terms of their members to check if any could be liable to be taxed as employees under the new rules and, if so, whether their terms should be changed so they no longer satisfy all the conditions. For instance, that they contribute more than 25 per cent of their disguised salary as capital.

Alex Cook is a Director at Helix. Alex initially trained academically as an unregistered barrister and was a Partner and Head of Civil Litigation at a large firm based in the South East before joining Helix Law. As well as focussing on expanding Helix, Alex specialises in commercial and property related litigation and he has acted for a broad range of clients including offshore property investment funds, small businesses and individual property owners.

This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of  this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice. 

Contact Helix Law on 01273 761 990 or email: [email protected]