The past 18 months or so have seen some significant changes in the taxation of partnerships and LLPs of which advisers need to be aware. At a glance, advisers need to have on their checklist:
- Company loans to partnerships
- Non-equity members of UK LLPs
- Corporate members of partnerships or LLPs
Now, the detail. First, Finance Act 2013 extended the scope of s455 (“loans to participators”) to loans made by close companies to partnerships (including LLPs) one or more of the members of which is an individual who is also a participator in the lender.
It should be noted that there is no motive test and no de minimis test: the charge applies even if the loan is made on fully commercial terms and even if participators in the company have only a tiny financial interest in the LLP, though it does not apply to a loan made in the ordinary course of a money-lending business nor to the extension of normal commercial credit of up to six months for the supply of goods or services. The charge applies only to loans made after 20 March 2013; so care should be taken to ensure that pre-March 2103 “golden loans” are not inadvertently repaid and replaced with new ones which will be caught.
The second major change is to re-characterize certain members of LLPs (but not of other partnerships) as employees for tax purposes.
The legislation is aimed at “fixed share” or “salaried” members of LLPs whose income and capital is not at risk in the same way as “equity” members and who do not take an active part in the management of the LLP; it applies unless one of three statutory tests is passed. Probably the easiest to fulfill is that of “providing capital” – the new rules will not apply if the LLP member has contributed capital equal to at least 25% of any “fixed salary” allocated to the member. There is, however, a pitfall even in this: the arithmetic of the legislation has the result that if an existing member does not pass the test as at the start of the tax year the amount of capital which must be contributed to pass it increases day by day until by the end of the year it becomes virtually impossible to pass the test until the clock “re-sets” at the start of the following tax year. The alternative tests– the extent to which profit share is genuinely variable and involvement in management of the business – are even less certain of success.
The third change broadly speaking bars an individual from being in partnership with a “personal” company in which he or she has a substantial economic interest. Such structures have been used both in tax planning arrangements planning and in commercial situations far removed from any thought of tax mitigation. No matter: they are now tarred with the “unacceptable tax avoidance” brush and they will need to be examined with a view to replacement with an alternative structure. This is likely to be either a simple company or a partnership (or LLP) involving only individuals. Either way, the tax issues arising on restructuring may be considerable.
What should practitioners be talking to their clients about?
- For any partnership or LLP, check whether there are any loans outstanding from companies: if there are, check what connection there is between the company and any individual member of the partnership.
- For LLPs, check to see whether there are any “fixed share” or other non-full-equity members. If there are, discuss the options with the partnership: are they happy to apply PAYE and NIC to all payments to the “fixed share” partners? If not, what’s the most appropriate “escape route” to use and what do you need to do to ensure that it applies? And remember that – if there is a problem and depending on the solution you choose– you may be stuck with PAYE and NIC until the end of this tax year anyway.
- Review all partnerships or LLPs which include companies as members. Are they caught by the new rules? If so, will the affected members live with it? Or is a major restructuring required?
David Whiscombe is Tax Technical Director and Internal Counsel at BKL Tax. He shares his extensive knowledge gained over 30 years in tax by writing chapters for Accounts and Audit of Limited Liability Partnerships, Fourth Edition and Tax Planning 2014/15 (Bloomsbury Professional).