llp tax changes dec 2013 - kingston smith · changes changes to the partnership tax rules and to...

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


Capital

One or more partners overdrawn

LLPTrade


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’


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


Uncommerical charge to LLP

LLPTrade

Service companyEngages staff

Individual members


Excess profits

Profit share covers drawings & tax

LLPTrade


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


Excess profits


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


Excess profits


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


Excess profits


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


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


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


Large Large Large Large


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.

llp tax changes dec 2013 - kingston smith · changes changes to the partnership tax rules and to...

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