Top 50+50 LLPs make cash call due to tax changes

A SIGNIFICANT NUMBER of firms in Accountancy Age‘s 2014 Top 50+50 made cash calls to partners caught by the tightening of LLP tax legislation.

Of the 49 LLPs within the latest Top 50+50 survey, 34 said they were in some way affected by the tightened rules, with 21 admitting they were forced to make cash calls to the partners caught by the new legislation.

In all, firms confirmed to Accountancy Age at least £3.8m was paid in cash injections, although the true number is likely to be far higher. The 2014 Top 50+50 survey of UK firms will be released on Wednesday 23 July.

The rules around LLPs were tightened, making it more onerous for partners to retain their status. A three-point check was introduced, taking effect from April, which, if partners fail to meet, sees them taxed as an employee.

The government harboured concerns that limited liability partnership structures allowed “disguised employment” to take place, whereby people that are ostensibly partners in fact have a guaranteed income and little decision-making power.

The result is salaried partners now have to either be treated as employees, replete with National Insurance contributions, the other alternative being satisfying one or more of three conditions set out by HMRC. The first option is ensuring at least a quarter of their pay is profit-dependent; the second option is to prove they have significant influence on the overall partnership; the third – and most common – would see them contribute at least 25% of their ‘fixed pay’ to the firm’s capital.

The preference for the latter option led to banks struggling to provide the necessary loans in time for the commencement of the legislation, leading to extensions put in place provided evidence of the commitment could be produced.

KATO Consulting director Phil Shohet said the numbers illustrate the amount of upheaval firms underwent as a result of the law change.

He said: “It causes a massive constitutional and commercial problem for firms. Salaried partner is a stepping stone and provides flexibility to both the firm and the partner.

“A lot of them are, in effect, managers and are provided status by the term ‘partner’. Often, they won’t make equity either because their firm doesn’t believe they’re ready yet or the partner doesn’t feel prepared. Now they are put in a position where they have to make a decision when they don’t want to.

“Firms now have to ask whether they are justifying their existence as partners.”