Businesses constituted as limited liability partnerships (LLP) should review the suitability of their current structure following the introduction of the new partnership taxation regime. They should take action by seeking clearance from HMRC following Royal Assent of Finance Bill 2014 on 17 July 2014 or consider converting to a limited company structure.
With half the calendar year behind us already and the new partnership regime in force since April 2014, businesses will be looking at performance to date and getting a sense of expected profit levels at the year end. With the inability to warehouse profits in a corporate vehicle and uncertainty over the taxation on individual members, it’s time to stick or twist.
Stick: Stay as an LLP
Following Royal Assent on 17 July 2014, businesses can now seek clearance from a dedicated partnership team at HMRC as to whether they fall within the salaried members legislation. This legislation seeks to reclassify certain self-employed partners as employees, imposing all the PAYE and NIC withholding requirements that apply to employees and the additional employer’s NIC charge. In addition, businesses should consider how the inability to allocate to corporate members without potentially incurring a tax charge on the individual members will impact their operating models.
In response, Kinetic Partners is launching a partnership clearance service whereby we will approach HMRC on behalf of clients seeking clearance on the application of the salaried member legislation. We will set out our interpretation of the new legislation and how it applies to a client’s circumstances based on our experience and dialogue to date with HMRC. In addition, we will proactively negotiate and obtain a clearance that removes unwanted uncertainty and tax risk from the business.
Twist: Convert to a Ltd
For some businesses, converting to a limited company will be the best option, particularly where retaining profits to fund future growth is an important requirement going forward. Under the new partnership tax legislation, it will be difficult to retain profits at corporate tax rates, leaving partnerships significantly disadvantaged compared to a limited company structure. Businesses such as fund managers which have performance fees crystallizing at the end of December must act now if they hope to get regulatory approval before fees crystallize.
Kinetic Partners is currently helping a number of businesses undertake such restructuring, advising on the tax, regulatory and accounting issues. Although straightforward in principal, there are a number of pitfalls and opportunities to be considered, such as accessing incorporation/gift relief, recognition and write off of goodwill, accessing entrepreneur’s relief, appropriate remuneration/dividend policies and avoiding a VAT charge on conversion.