Chartered Accountants and Professional Business Advisers

Tightening up on Partnerships

New restrictions apply from 6 April 2014. They target three main areas.

  • ‘Fixed share’ or ‘disguised employment partners in LLPs
  • Tax-motivated profit-sharing arrangements in mixed partnerships
  • Transfers of assets or income streams by partners.

‘Fixed share’ or ‘disguised employment’ partners in LLPs

It is commonplace in some industries (notably professional services) for senior employees to be made a ‘partner’, but to be given a fixed amount each year and sheltered from most of the commercial risk. The main benefit has been to save employers’ national insurance contributions (NICs), currently 13.8%.

Now, the profit share of those members whose status is affected will be treated as employment income, subject to PAYE and Class 1 NIC. Their ‘salaries’ and the associated employer’s NIC will then be a tax-deductible expense of the LLP. This will apply if all three of the following apply.

A - It is reasonable to expect that at least 80% of the amounts payable for the member's services will be

  1. Fixed,
  2. Variable, but variable without reference to the overall results of the LLP, or
  3. Not, in practice, affected by the overall results of the LLP

Of these the last, with its emphasis on 'not in practice', will apply if a member's fixed share is to be reduced if the LLP's profits are insufficient to meet members' fixed shares but this is very unlikely, or if the member is given a percentage of profits in excess of members' fixed shares but the percentage is such as to be highly unlikely to represent 25% of his fixed share.

B - The member does not have 'significant influence' over the affairs of the LLP.

In practice most members of an LLP of any size will struggle to demonstrate ‘significant influence’.

C - The member's capital contribution is less than 25% of the member's 'disguised salary'.

For those already members of an LLP by 5 April 2014 there was to be a 'firm commitment' by 5 April 2014 to contribute capital within 3 months. For those becoming members after 5 April 2014, the 3 months is cut to two. For this purpose capital doesn't include temporarily undrawn profits or tax reserves.

The test is applied prospectively and reasonably, and will not be re-visited with the benefit of hindsight if the initial assumptions are incorrect. There are anti-avoidance provisions to counter arrangements regarded as artificial. For example, if a member is enabled to introduce sufficient capital by means of a non-recourse loan.

Many think that imposing a capital requirement offers the best way out.

A further provision is that, if an individual gives his services through a non-individual (typically a company), in order to avoid the new disguised salary provisions, the individual is treated as receiving the profit share of the non-individual member for tax purposes.

Tax motivated profit sharing arrangements in mixed partnerships

Typically, a corporate partner’s shareholders would include the individual partners. This enables profits (notably surplus or undrawn) to be allocated to the corporate partner, which pays tax at a much lower rate than the individual’s (often up to 45%).

The legislation will re-allocate profits where those attributed to a corporate partner are held to be excessive. Only profits which reflect the corporate partner’s services (excluding any supplied by the individual partner) and an ‘appropriate notional return on capital’ (a rate which ‘in all the circumstances’ is a commercial return on capital) can be allocated to the corporate partner. Any excess is then treated as part of the individual partner’s profit share for income tax purposes.

Furthermore, if the profit share of a non-individual partner is derived, at least in part, from services provided to the firm by an individual who it would be reasonable to suppose would have been a partner in the firm during the relevant period of account or any earlier period, the excess of the non-individual partner’s profit share over the aggregate of ‘the appropriate notional return on capital’ and ‘the appropriate notional consideration for services’ other than the services of the individual partner) is treated as that individual’s for tax purposes.

Where either provision applies, payments may be made without income tax consequences by the non-individual partner to the relevant individual, up to the amount of income that the latter is deemed to have for tax purposes.

Individual partners will be denied relief from 2014/15 for losses which result from ‘relevant tax avoidance arrangements’ – such as those which reduce the loss that would otherwise arise to a corporate partner.

The legislation also includes provisions effective from 6 April 2014 to deal with certain tax consequences of the Alternative Investment Fund Managers Directive (AIFMD). Where, in consequence of the AIFMD, certain partnership profits can’t be immediately accessed and the firm so elects, those deferred profits aren’t allocated to the partners as such, but to the firm itself and taxed at 45%. Credit is given for this tax when the profits subsequently vest in partners.

Transfer of assets or income streams by partners

Another provision is aimed at tax-motivated disposals of the right to receive sums that would otherwise go to an individual partner if arrangements are made after 5 April 2014.

If it applies, the consideration received (substituting market value if the consideration is substantially less than market value) is to be treated as the transferor’s income for income tax purposes. A comparable provision applies to companies if the arrangements are made after 31 March 2014.

Specific advice should be obtained before taking action, or refraining from taking action, in relation to the above.


Need more help? Please contact us at or +44 (0)20 7312 0000