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Long-awaited revised LLPs guidance unveiled

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The guidance concerns the salaried partner rules, which are due to come into effect on 6 April 2014. It explains that the purpose of the new rules is to ensure that LLP members, who are in effect providing services on terms similar to employment, are treated as ‘employees’ for tax purposes. If all three conditions are met, these individuals will be subject to PAYE and tax on benefits in kind.

The ‘disguised salary’ condition is a key indicator in determining whether a member is a salaried member. The new guidance makes it clear (following comments received) that the new rules will only apply if more than 80% of a member’s remuneration takes the form of ‘disguised salary’. Broadly, ‘disguised salary’ is an amount which is fixed or, if variable, is not affected by the profits of the LLP – for instance, it is calculated by reference to the amount of work done. In this respect, the guidance helpfully confirms that a ‘fixed profit share’ payable to junior partners is not ‘disguised salary’, as the firm will have no obligation to pay it in the unlikely event that the profits are insufficient – nor is a payment made on account.

The second condition, ‘significant influence’, does not seem to have evolved post-guidance. If a member ‘merely works in the business rather than carry it on’, the condition will be satisfied. The guidance recognises that some members may not be involved in the day-to-day management but will still be able to exert significant influence. That said, this condition remains a concern, as many large LLPs will struggle to establish that each of their members exercises a ‘significant influence’ over the firm’s affairs.

The third condition, ‘capital contribution’, has been relaxed slightly around timing. A capital contribution at least equal to 25% of ‘disguised salary’ will secure partnership treatment. The guidance makes it clear that members will have either three months (for individuals who are already members on 6 April 2014) or two months (for individuals who become members after 6 April 2014) to provide the capital.

Finally, the guidance contains some useful examples of transactions which will and will not fall within the scope of the TAAR. Essentially, the TAAR is intended to catch restructurings which seek to fall within the letter of the provisions but shelter a member from any economic risk linked to the LLP – for instance, because the member’s capital contribution is financed by a non-recourse loan from the LLP.