llp tax changes dec 2013 - kingston smith · changes changes to the partnership tax rules and to...
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Changes Changes Changes Changes to the partnership tax rules and to the partnership tax rules and to the partnership tax rules and to the partnership tax rules and
the impact on your the impact on your the impact on your the impact on your businessbusinessbusinessbusiness
Mike Hayes
10 December 2013
Starting point
� Consider the ‘offensive structures’
� The changes:
– Close company participator rules
– Transfer pricing
– Corporate members
– Salaried members
� What still works
� Incorporation of a partnership or LLP
Offensive structure - 1
LoanLLP
Trade
Individual members
Corporate memberPassive?
s455 CTA 2010
� Applies:
– Where a close company
– Makes a loan to a participator or an associate of a
participator
� Definitions?
� Company pays corporation tax on loan at 25%
� Provision for tax to be repaid as loan is repaid
s455 CTA 2010
� “There are also doubts about the application of
[s455] to loans to a partnership whose members
include the company itself. The loan cannot
reasonably be viewed as a loan to the other
partners.”
� Previously did not apply to our structure
s455 CTA 2010
� Loans advanced after 20 March 2013:
– An LLP or other partnership one or more of the partners
in which is an individual who is:� A participator in the company; or
� An associate of an individual who is a participator
� Planning:
– Advance monies as capital
– Undrawn profits?
– Trading balances
Offensive structure - 2
Capital
One or more partners overdrawn
LLPTrade
Corporate memberPassive?
Individual members
Example
TotalTotalTotalTotalCorporate Corporate Corporate Corporate
membermembermembermemberSuarezSuarezSuarezSuarez SturridgeSturridgeSturridgeSturridge
Profit: 500,000 460,000 20,000 20,000
Capital
account:
B/Fwd. 100,000 34,000 33,000 33,000
Profit share 500,000 460,000 20,000 20,000
Drawings (300,000) (150,000) (150,000)
C/Fwd. 300,000 494,000 (97,000) (97,000)
s464A
� Arrangements conferring benefit on participator
– A close company is at any time a party to tax avoidance
arrangementsarrangementsarrangementsarrangements, &
– As a result of those arrangements, a benefitbenefitbenefitbenefit is conferred
(directly or indirectly) on an individual who is a
participator/associate in the company, or
� Charge on company = 25% of value of benefit
conferred
Planning
� Applies to arrangements to which a close company
becomes a party on or after 20 March 2013
� Part of the arrangements may have occurred earlier
� Profit sharing & drawings
� Reminder – ‘bed & breakfasting’
Offensive structure - 3
Uncommerical charge to LLP LLP
Trade
Service companyEngages staff
Individual members
Example
Service companyService companyService companyService company LLPLLPLLPLLP
A/c profit Tax profit A/c profit Tax profit
Profit before staff costs 1,500,000 1,500,000
Staff cost (1,000,000)
Charge to LLP 1,000,000 0 (1,000,000) (1,000,000)
Profit before transfer
pricing0 0 500,000 500,000
Transfer pricing
adjustment – 10%100,000 (100,000)
Revised profits 0 100,000 500,000 400,000
Transfer pricing
� Mandatory for large companies
� Medium-sized enterprise:
– Staff headcount less than 250; and
– Either:
� Turnover not exceeding €50m; or
� Balance sheet total not exceeding €43m
� SMEs exempt unless they ‘elect in’
� Compensating adjustments
The change� No draft legislation yet
� WEF 25 October 2013
� Compensating adjustments will not be allowed
� Planning:
– SMEs:
� Election irrevocable
� Collapse structure
� Adjust actual price to arm’s length price
– Large companies – see above
Offensive structure - 3
Uncommerical charge to LLP
LLPTrade
Service companyEngages staff
Individual members
Offensive structure - 4
Excess profits
Profit share covers drawings & tax
LLPTrade
Corporate memberPassive?
Individual members
Partnerships with mixed membership
� Applies to partnerships/LLPs with:
– Individual members
– Non—individual members
� Confusing start date:
– Comes into force from 5 December 2013
– A/C periods commencing on or after 6 April 2014
– Straddling periods beginning before 6 April 2014 as
though period falling on or after 6 April is a separate
period of account
Offensive structure - 4
Excess profits
Profit share covers drawings & tax
LLPTrade
Corporate member
B
Individual
member A
Condition X
� Amounts representing A’s deferred profit deferred profit deferred profit deferred profit are
included in B’s profit share
� As a result A’s profit share and taxable amount are
lower than they would otherwise have been
Condition Y� B’s profit share exceeds the appropriate notional appropriate notional appropriate notional appropriate notional
profitprofitprofitprofit
� A has power to enjoy power to enjoy power to enjoy power to enjoy B’s profit share
� It is reasonable to suppose that:
– All or part of B’s profit share is attributable to A’s power
to enjoy; &
– Both A’s profit share and the relevant tax amount relevant tax amount relevant tax amount relevant tax amount are
lower than they would have been in the absence of A’s
power to enjoy
Adjustment
� A’s profit share increased by so much of B’s share as
it is reasonable to suppose is attributable to:
– A’s deferred profit
– A’s power to enjoy
Definitions� Deferred profit Deferred profit Deferred profit Deferred profit - any remuneration or benefits or
returns the provision of which to A has been deferred
(conditional or otherwise)
� Power to enjoy Power to enjoy Power to enjoy Power to enjoy –
– A is connected with B; &
– Any of enjoyment conditions satisfied
� Appropriate notional profit Appropriate notional profit Appropriate notional profit Appropriate notional profit – appropriate notional returnnotional returnnotional returnnotional return
on capital & notional consideration for servicesnotional consideration for servicesnotional consideration for servicesnotional consideration for services
Definitions
� Notional return on capital Notional return on capital Notional return on capital Notional return on capital –
– Time value of money equal to B’s contribution to the
firm; and
– At a rate which is a commercial rate of interest; less
– Amount paid not included in B’s profit share
� Notional consideration for services Notional consideration for services Notional consideration for services Notional consideration for services –
– Arm’s length price; less
– Amount paid not included in B’s profit share
Definitions
� Relevant tax amount Relevant tax amount Relevant tax amount Relevant tax amount – total amount of tax payable
by A & B ignoring s740C
Offensive structure - 4
Excess profits
Profit share covers drawings & tax
LLPTrade
Corporate member
B
Individual
member A
….and there is more….
� If A provides services to the firm, but is not a partner,
A is also caught if it is reasonable to suppose that A
would have been but for the provisions of s850C
� If B makes a payment to A to reimburse for the extra
tax it pays – this is not treated as income for any
purposes
� Likewise reimbursement of extra profit share
Comment
� *^*³”*!!!!
� Very widely drawn:
– Benefit
– Arrangements
– Just & reasonable
– Reasonable to suppose etc.
� Subjective – commercial rate etc.
� Look at detailed conditions
Offensive structure - 4
Excess profits
Profit share covers drawings & tax
LLPTrade
Corporate member
B
Individual
member A
Planning
� Adjust profit shares in accordance with legislation
� Note additional profits taxable on A will reduce B’s
taxable profits
� But without reimbursement value still in B –
additional tax on dividend or winding up
� Collapse structure
Offensive structure - 5
Bonus creates a loss
for B
Large bonus
LLPTrade
Corporate member
B
Individual
member A
Illustration
Total profitTotal profitTotal profitTotal profit Corporate member Corporate member Corporate member Corporate member –––– BBBB Individual member Individual member Individual member Individual member ---- AAAA
A/C profitA/C profitA/C profitA/C profit Tax profitTax profitTax profitTax profit A/C profitA/C profitA/C profitA/C profit Tax profitTax profitTax profitTax profit
Year 1 300,000 250,000 250,000 50,000 50,000
Year 2 300,000 250,000 250,000 50,000 50,000
Year 3 [300,000][300,000][300,000][300,000]
Bonus to A 600,000 0 0 600,000 600,000
Balance (300,000) (250,000) (250,000) (50,000) (50,000)
Tax
adjustment250,000 (250,000)
Total 900,000900,000900,000900,000 250,000250,000250,000250,000 500,000500,000500,000500,000 650,000650,000650,000650,000 400,000400,000400,000400,000
New rule� Applies to trades, UK & overseas property
businesses
� If A makes a loss a loss as a partner:
– A’s loss arises wholly or partly
� Directly or indirectly; or
� Otherwise in connection with
relevant tax avoidance arrangement
� No loss relief will be given to A
� But A has not made a loss!
New rule
� ‘Profit skewing’/bonus arrangements still work
� But it relies on large profits being apportioned to
company in the first part of any bonus period
� Losses for 2014/15 (tax year)
� Eg:
– YE: 31 March 2015
– YE: 30 April 2014 – but apportionment for period
starting on or after 6 April 2014
Offensive structure - 6
Fixed profit shares
LLPTrade
Equity members Individual member
Pre-LLPs
� Stekel v Ellice [1973] 1 WLR 191
� It was acknowledged that it was possible for a
partner in a partnership to be an employee for tax
purposes:
– Fixed profit shares
– No Capital
– Limited or no voting
– Not a bank signatory
LLPs
� Tax legislation provided that a member of an LLP
would be treated as self-employed
� Result – making employees members on fairly
similar terms to employment to save employer’s NIC
Disguised employment
� From 6 April 2014
� A “salaried member” of an LLP is an individual
member of the LLP who, on the assumption that the
LLP is carried on as a partnership by two or more
members of the LLP, would be regarded as
employed by that partnership.
Disguised employment
� A “salaried member” of an LLP includes an individual
member of the LLP who does not meet the first
condition but who:
– has no economic risk (loss of capital or repayment of
drawings) in the event that the LLP makes a loss or is
wound up;
– is not entitled to a share of the profits; and
– Is not entitled to a share of any surplus assets on a
winding-up.
Insignificant risk
� What is ‘insignificant’ will be determined in the light
of all the circumstances and by reference to the
overall package of benefits derived from the
partnership agreement
� In line with normal practice, an entitlement to share
in the profits that for practical purposes would never
be more than 5% of any fixed entitlement would be
unlikely to be regarded by HMRC as significant
Planning
� Wait until draft Finance Bill
� Likely need to amend status of existing salaried
members - consider:
– Variable profit share
– Capital & capital profits
– Voting
� Or pay the NIC!
� Employment law issues?
LLP changes generally
� Projected additional tax from all measures for
2014/15 to 2018/19:
– Budget 2013 - £1.3 billion
– Autumn Statement - £3.3 billion
� 3+ month window to do some planning
Why not incorporate?
Small Small Small Small
companycompanycompanycompany
Marginal Marginal Marginal Marginal
companycompanycompanycompany
Large Large Large Large
companycompanycompanycompany
Salary 53.43% 53.43% 53.43%
Dividend 44.44% 44.44% 44.44%
Interest or rent 45% 45% 45%
Self employment 47%
Effective tax rates 2015/16:Effective tax rates 2015/16:Effective tax rates 2015/16:Effective tax rates 2015/16:
Example:
� LLP has net tangible assets of £1M
� Goodwill (not in accounts) valued at £2M
� Process:
– Form company & capitalise to appropriate level
– Some time later – sell assets to company at MV - £3M
– Consideration left on loan account
Benefits� Entrepreneurs’ relief available so that tax on gain is
only £200K
� Loan account can be drawn down and salaries kept
within say basic rate band
� Possible corporation tax deduction for goodwill if
business commenced on or after 1 April 2002
� Profits taxed at low corporation tax rates
� Thereafter salary + dividends
But…..� HMRC might not agree MV of goodwill
– Valuation too extravagant?
– Personal goodwill?
� As profits accrue - shares will acquire value
� Protection of SP D12 will be lost
� Employment related securities issues
� Incoming & retiring ‘partners’
� Generally more difficult for professional firms
And finally…..
……any questions?
Contact details
� Email: [email protected]
� Office: 020 7566 4000
� Direct line: 020 7566 3813
� Mobile: 07920 131 063
� Web: www.kingstonsmith.co.uk
Disclaimer
This presentation covers topics only in general terms and are intended to give a wide audience, an outline
understanding of issues in tax, and therefore cannot be relied on to cover specific situations; applications of the
principles set out will depend on the particular circumstances involved. Furthermore, responses given in the seminar to
questions are based on only an outline understanding of the facts and circumstances of the cases and therefore do not
form an appropriate substitute for considered specific advice tailored to your circumstances. We recommend that you
obtain professional advice before acting or refraining from acting on any of its contents. We would be pleased to advice
you on the application of the principles outlined in this presentation to your specific circumstances, but in the absence
of such specific advice cannot be responsible or liable.