Limited Liability Partnerships (LLPs): Treatment of Salaried Members

New rules (the ‘salaried member rules’) taking effect on 6 April 2014 will change the treatment of a salaried member of an LLP from that of a partner to that of an employee for both income tax and corporation tax purposes. They will apply at any time when an individual (M) is a member of an LLP and:

  • it is reasonable to expect that at least 80% of the total amount payable by the LLP in respect of M’s performance of services for the LLP in M’s capacity as a member will be ‘disguised salary’;
  • the mutual rights and duties of the members, and of the LLP and its members, do not give M significant influence over the affairs of the LLP; and
  • M’s contribution to the LLP is less than 25% of the disguised salary which it is reasonable to expect will be payable by the LLP for M’s performance of services during the tax year in M’s capacity as a member.

Associated changes are being made to NICs legislation. An amount is ‘disguised salary’ (i) if it is fixed; or (ii) if it is variable, it is variable without reference to, or is in practice unaffected by, the amount of the LLP’s profits or losses.

In determining whether the salaried member rules apply, any arrangements with a main purpose of circumventing the rules will be disregarded. The salaried member rules apply equally in the case of an individual who is not a member of an LLP if that individual performs services for the LLP under arrangements involving a non-individual member of the LLP and those arrangements have a main purpose of securing that the salaried member rules would not otherwise apply to the individual. The salaried member rules do not apply to an individual if the reason they would otherwise apply is a consequence of arrangements with a main purpose of circumventing the new mixed membership rules summarised below; this exception will come into effect on the date of Royal Assent to Finance Act 2014.

Where the salaried member rules apply, any expenditure incurred by the LLP in respect of the member’s deemed employment is deductible in computing profits if it would be so deductible under general principles.

Partnerships with Mixed Membership

A mixed membership partnership is a partnership where the members include both individuals and non-individuals (most often companies). In relation to mixed membership partnerships (including any that are limited liability partnerships), new legislation will reallocate to an individual partner excess profits allocated to a non-individual partner in cases where:

  • a non-individual partner has a share of the firm’s profit;
  • that share is excessive;
  • an individual partner has the power to enjoy the non-individual’s share or there are deferred profit arrangements in place; and
  • it is reasonable to suppose that the whole or part of the non-individual’s share is attributable to that power or those arrangements.

There will also be provision to reallocate excess profits to an individual who is not a partner if it is reasonable to suppose that the individual would have been a partner but for the above rules.

The above will have effect from 6 April 2014 but will also affect periods of account beginning before and straddling that date. In addition, loss reliefs will be denied for a loss allocated to an individual partner where that individual is party to arrangements a main purpose of which is to secure that some or all of the loss is allocated to the individual, instead of to a non-individual, with a view to the individual obtaining loss relief. This will apply in relation to losses arising on or after 6 April 2014, with periods of account straddling that date being split into two notional periods for this purpose.

Disposals of Assets through Partnerships

New legislation will apply where as a result of an arrangement a person disposes of all or part of an asset or income stream by or through a partnership to another member and a main purpose of the disposal, or any of the steps by which it is effected, is to secure an income tax or corporation tax advantage. The legislation will impose on the person making the disposal a charge to tax on income. The chargeable amount is the consideration given for the asset or income stream, unless that consideration is much less than the value of the asset, in which case the charge will be on market value. The legislation will have effect in relation to arrangements entered into on and after 6 April 2014 for income tax and 1 April 2014 for corporation tax.

Partnerships Managing Alternative Investment Funds: Deferred Remuneration etc.

A mechanism will be introduced from 6 April 2014 for members of AIFM partnerships to allocate certain restricted profits to the partnership. These are profits that those members cannot immediately access because of requirements under the EU’s Alternative Investment Fund Managers Directive to defer remuneration of key staff. The legislation will impose a charge to tax on these businesses at the additional rate of tax (45%) to be paid by the AIFM partnership. An AIFM partnership is a partnership or limited liability partnership that manages alternative investment funds. The AIFM partnership must make an election if these rules are to have effect; this must be made within 6 months after the end of the first period of account for which it is to have effect.