December 2013 saw the publication of legislation which has a dramatic effect on virtually all Limited Liability Partnerships (LLPs) in the UK. It deals with “disguised salaries” of LLP members and other anti-avoidance measures for tax purposes. The legislation will generally take effect from 6 April 2014 but with some measures already effective from 5 December 2013 where there are tax motivated profit allocation structures. Under the disguised salary rules a member of an LLP will be treated as an employee for tax purposes if all of the following conditions are met:

  1. if an individual performs services for the LLP and the amounts payable by the LLP in respect of the individual’s performance will be wholly or substantially wholly fixed, or if variable, variable without reference to, or in practice unaffected by, the overall profits or losses of the LLP;
  2. the mutual rights and duties of the members and the LLP and its members do not give the individual significant influence over the affairs of the LLP; and
  3. the individual’s contribution to the LLP is less than 25% of the disguised salary.

There are also new rules which apply to LLPs which have corporate entities as members. The legislation will reallocate for tax purposes excess profits from a corporate partner to an individual partner where the following conditions apply:

  1. a corporate partner has a share of the firm’s profits which is excessive;
  2. an individual partner has the power to enjoy the corporate’s share or their preferred profit arrangements; and
  3. it is reasonable to suppose that the whole or part of the corporate share is attributable to that power.

HMRC have also restricted the ability to allocate income and capital losses between individuals and corporate partners where it is tax motivated.

The Edwin Coe team are already working on varying partnership arrangements in both the professional services and in the financial services sectors. Few, if any, LLPs remain unaffected by this draft legislation and partnerships will be looking at the options which may include increasing capital contributions, members becoming salaried or self-employed. Complications arise where firms financial year end will not coincide with 5 April 2014.

For further information please contact:

Victor Hawrych, Corporate Partner
Email: victor.hawrych@edwincoe.com
Tel: 020 7691 4065



Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.

Edwin Coe LLP is a limited liability partnership registered in England and Wales (No. OC326366) and is authorised and regulated by the Solicitors Regulation Authority. A list of members of the LLP is available for inspection at our registered office: 2 Stone Buildings, Lincoln's Inn, London WC2A 3TH. "Partner" denotes a member of the LLP or an employee or consultant with the equivalent standing. Our privacy notice which we are obliged to give you under the GDPR is available here.

Please also see a copy of our terms of use here in respect of our website which apply also to all of our blogs.

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