Just 10 days before the implementation of the Taxation of Partnerships legislation HMRC have issued refined guidance alongside the 2014 Finance Bill.
We had been expecting late guidance on the mixed member partnership rules but not the additional revision to the salaried member guidance.
On first review our key comments are:
Mixed member LLPs-As known under the proposals profits can be relocated to individual members where those allocations to corporate entities are in excess of appropriate notional returns on capital and appropriate notional considerations for services, where an individual member possesses the power to enjoy the allocation. It must be reasonable to suppose the allocation was attributable to the individual’s power to enjoy.
HMRC, in the updated guidance, makes it explicit that an appropriate notional return on capital is the rate which is reasonably comparable to a commercial rate of interest on the capital contributed, and that it is not relevant that an equity return on the same investment would have been higher. In an example, HMRC uses a 2% commercial rate of interest.
They also note that should the corporate member receive a fee, that fee may be considered a return on capital and deducted when arriving at the notional return on capital.
In a change from their original guidance, HMRC indicates that “…it will nearly always be reasonable to conclude…” that profit allocated to a corporate for contributing a business to an LLP (i.e. on a conversion) would be subject to reallocation.
This guidance also reiterates that retention within a corporate for working capital purposes is intended to be caught.
It appears that an allocation of profit made to a corporate in an LLP’s return will be examined and likely reviewed by HMRC.
Salaried Members-There have been subtle changes to the application of Condition A which is now no longer described as the most significant test. In the main, the principles of the Conditions remain broadly the same.
All in all, it is disappointing that HMRC has not given taxpayers more time to arrange their affairs for the 2014-15 tax year just days before it begins.
With 6 April fast approaching, it’s last call to review the impact of the Partnership changes.