Changes to regulations for LLPs

Following the announcement in the Budget of proposals to review some aspects of partnership taxation, HM Revenue & Customs (HMRC) has issued a consultation document which could result in much larger liabilities for some firms.

While some of HMRC’s concerns relate to tax avoidance schemes, the proposals will affect more routine arrangements too.

The LLP structure is a popular choice for professional firms, as it provides all the benefits of incorporation, including limited liability and the flexibility of operating as a separate legal entity, with the familiarity of the partnership structure.

Since the introduction of the LLP, HMRC has somewhat surprisingly maintained that all salaried LLP members will be regarded as self-employed for tax and national insurance purposes, enabling firms to make substantial savings.

These proposals will bring this assumption to an end. However, salaried members may still be self-employed under general principles, so it is important to review their terms ahead of the changes to establish whether the savings may be preserved.

The discussion paper also refers to profit and loss allocation schemes, typically involving a partnership with a limited company member. It is clear that a number of professional partnerships and LLPs have such structures, and where these are being used to reduce the firm’s tax exposure, the new provisions will seek to counter this.

Consequently, firms need to examine their current partnership agreements to ensure they are fully compliant with the new regulations.

At Palmers Solicitors, we can advise on all aspects of business law, including drafting partnership agreements and the most appropriate business structures, and will be keeping a close eye on the consultation process. Please visit our website or contact BJ Chong at our Thurrock office for further guidance and information.