Tax year end planning: Partnership tax changes


Filed Under: Private Client

Planning tips for the tax year end.

Partnership crackdown

As announced in the 2013 Autumn Statement, there are proposals to significantly change the taxation of partners within partnerships from 6 April 2014. There are two new measures being proposed, the first of which seeks to address the question of disguised employees. Currently, all members of LLPs are treated, for tax purposes, as self-employed members.

This provides instant savings as there is no employers’ NIC and a slight reduction in the member’s NIC liability. However, from 6 April 2014, members who meet all of the following three conditions will be treated as an employee. The conditions are that:
  • the member is remunerated wholly or substantially by way of fixed amounts, or if this is variable, is unaffected by the partnership profit or losses;
  • the member has no significant influence over the partnership; and
  • the member’s contribution is less than 25% of the expected disguised remuneration mentioned in (a).

The second measure introduced will apply to mixed partnerships, where there are both individual and corporate members in the same partnership.

The rules are complex but broadly will result in profits allocated to a corporate partner being assessed on the individual partners, where the individuals can potentially still benefit from the money (for example as a shareholder). Excess losses allocated to individuals will be reassessed on the company and so will be unavailable to offset against other income in the individual’s hands.