LLPs await tax liability rise

Changes to the status of LLP members this year will have “significant” financial consequences for salary and equity partners but there could be an upside, say tax experts. 

HMRC’s partnership tax reform for LLPs is due to come into effect on 6 April 2014, from when many junior, salaried or even equity partners in LLPs will be treated as employees, depending on their share of profits, influence and investment of own capital in the business. 

Dominic Vincent, insolvency partner at Weightmans LLP, says the proposed reform is “an unwelcome reminder to professional practices that despite their best laid plans unexpected financial pressures can still arise in the most efficiently run businesses”.

However, Peter Noyce, head of professional services at accountants Menzies LLP, says: “Re-classifying fixed equity, and perhaps even full equity, partners as employees would add considerably to national insurance costs, but there is a bigger picture to consider.

“Since the introduction of alternative business structures and resultant influx of well capitalised new entrants to the legal services market, the gearing of law firms has become a problem and made it harder for them to compete. However, under the government’s proposals a partner in an LLP will not be deemed as employed if their capital contribution is more than 25% of their expected profit share.

“In the months leading up to 5 April 2014, many partners will choose to inject capital into the LLP to protect their self-employed status. This would immediately give firms a more robust capital base, a stronger balance sheet and improved working capital.

“The proposed tax changes offer a second potential benefit for law firm finances. One of the criteria for avoiding employed status is that partner remuneration should depend on the firm’s profits. This requirement may encourage a more prudent approach to drawings.”