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Tony Wickenden: New anti-avoidance powers target LLPs

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This year’s Budget announcement was relatively light on new anti-avoidance provisions. That’s not to say this year’s Finance Bill is light on new anti-avoidance provisions, though, as plenty of new provisions were announced in the 2013 Autumn Statement.

One of these new anti-avoidance provisions was directed at some important aspects of tax planning in relation to partnerships and LLPs. The new provisions, providing for the recategorisation of the “remuneration” taken by certain LLP members as employment income have attracted the greatest attention – and they are now in force.

The provisions to which I refer (directed at “disguised remuneration” arrangements) are the best publicised of two sets of provisions aimed at preventing perceived abuse by partnerships
and LLPs.

The other set of provisions oper-ates to counteract the “unjustifiable” allocation of profits or losses among mixed member partnerships,that is, partnerships with both individual and corporate partners. Typically, profit “excessively” allocated to corporate partners (lower rates) and losses to individual partners (higher rates and so greater value derived from use of the losses).

The disguised employment provisions only apply to LLPs though. Broadly speaking, if an LLP member satisfies all the following tests, then the amount they receive from the LLP as a profit share will be recategorised as employment income with onerous National Insurance (and PAYE) consequences.

The three tests 

1: That the individual performs services for the LLP in the capacity of a member and it is “reasonable to expect” that the amounts they receive in return are “wholly or substantially wholly disguised salary”. Here a payment is disguised salary if it is a fixed amount or a variable amount that is not in practice affected by the overall profits or losses made by the LLP.

2:  The second test is that the individual does not have significant influence over the affairs of the LLP under mutual rights and duties afforded to its members.

3:   The third test is that the individual’s capital or similar contribution is less than 25 per cent of their disguised salary from the LLP in the tax year under review.

These tests are sometimes expressed in the “reverse” accompanied by the statement that only one of the tests needs to be satisfied in order for the anti-avoidance provisions to be avoided. Only one of three criteria needs to be satisfied. These criteria are:

  1. That the individual performs services for the LLP in the capacity of a member and it is “reasonable to expect” that the amounts they receive in return are “wholly or substantially wholly disguised salary”. Here a payment is disguised salary if it is a fixed amount, or a variable amount that is not in practice affected by the overall profits or losses made by the LLP.
  2. The second test is that the individual does not have significant influence over the affairs of the LLP under mutual rights and duties afforded to its members.
  3. The third test is that the individual’s capital or similar contribution is less than 25 per cent of their disguised salary from the LLP in the tax year under review.

These tests are sometimes expressed in the “reverse” accompanied by the statement that only one of the tests needs to be satisfied in order for the anti-avoidance provisions to be avoided. Only one of three criteria needs to be satisfied. These criteria are:

  • flexible, profit-linked salary
  • significant influence, or
  • the required “25 per cent” capital contribution.

It has been reported that some potentially affected LLP members are weighing up the merit of contributing the requisite amount of capital to satisfy one of the tests and so avoid the application of the anti-avoidance provisions. One bank (at least) has reported a significant surge in loan applications from potentially affected LLP members.

It seems that the “capital contribution test” (rather than the “profit-linked feasibility” or “significant influence” tests) is felt to be the easier one to satisfy.

Another way to avoid the test is to eschew LLP status altogether and go for corporate status with, presumably, remuneration by dividend to avoid the NIC consequences.

This reported action is evidence, as if any were needed, that tax change can act as a lever on commercial decisions.

Financial planners with LLPs (and partnerships) as their clients should consider asking what, if any, effect the two anti-avoidance provisions have on the firm.

If there is to be any change in the tax status of the business (especially if it incorporates) or the individuals, eg from members/partners to employees or (in the case of a change to a corporate structure) shareholding directors, then (even existing) financial planning strategies need to be reviewed and possibly changed to reflect this.

This review should extend to protection-based strategies established, or to be established, to provide business succession or business continuation solutions.

Understandably, present focus will have been on the direct impact of the anti-avoidance provisions in relation to the immediate income tax implications.  Regardless of this (in most cases) inevitable truth, it will be important to draw breath after the immediate impact of any business change has been absorbed and then review whether any change to business protection arrangements may be necessary.

For many partnerships and LLPs, though, this “inconvenience” will not need to be addressed. Why? Because a significant number of businesses will not have addressed the important (but often uncovered) needs of business continuation and business succession. Opportunity? Absolutely.

 Tony Wickenden is joint managing director of Technical Connection

Access full CPD, technical updates and business generation ideas through Techlink Professional.  Go to www.techlink.co.uk and click the Contact Us link at the top of the screen and then request your free trial from the drop down menu.

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