Government Targeting Limited Liability Partnerships (LLP) With New Tax Changes

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International law firm Eversheds are the latest firm to ask their partners to contribute capital following the changes to the taxation of LLP structures.  The firm is asking 164 of their fixed share partners to contribute 25% of their profit shares.

HMRC have clarified the definition of LLP Membership and this move by Eversheds is as a result of that definition change.  The changes have come into force and it will mean that some LLP members who have previously been treated as self employed will be taxed as employees.

The government was concerned that the LLP structure allowed businesses to disguise employment to take place whereby people that are effectively partners in fact have a guaranteed income and little decision making.  Under the changes partners must satisfy tests in order to maintain their status one of which is to see them contribute at least 25% of their fixed pay to the firms capital and this is the format most law firms seem to be undertaking.

HMRC have said that the new rule will deliver a fairer outcome for tax payers ensuring that those who are in reality employees are treated as such for tax purposes which will protect over £3bn in tax.

The new regime may also create tension between HMRC’s definition of an employee for tax purposes and also when a member is deemed to be an employee by an employment tribunal, therefore it will be interesting to see in the future if the new tax test does reopen an employment debate.  However, in our opinion LLP’s must now bring that employment question into their planning of their LLP as otherwise they could be exposing themselves to any kind of future litigation.

Should you require any advice in respect of business structures such as LLP’s please do not hesitate to contact  Forbes Solicitors’ Business Law Department  or call 0800 037 4628 and we will be happy to assist.

Pauline Rigby

About Pauline Rigby

Pauline Rigby is Head of the Corporate and Restructuring team at Forbes Solicitors. Pauline’s blogs cover a wide range of corporate issues, specifically areas including company formation, banking, joint ventures and shareholder matters, contractual matters and equity fundraising or investing.
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