New threat for LLPs

4 March 2014

It’s been warned many LLPs (limited liability partnerships) may be at risk of closing come April after new tax regulations have been finalised by HMRC.

HMRC is cracking down on tax avoidance by ensuring LLPs provide evidence they are self-employed and are eligible to lower tax rates. They want to put a stop to those who are giving false information in order to avoid paying taxes.

The LLP business structure was set up in 2000 to protect law firms if they were involved in large losses and lawsuits. They have more protection against personal liability than partnerships and sole traders, yet there is still an element of tax efficiency enabling many to fall in line with the traditional partnership tax structure.

HMRC’s new rules state a partner must pass at least one out of three tax ‘tests’ to continue being classed as self-employed.

A partner will be considered as an employee (therefore face higher tax rates) if 80% or more of their pay is guaranteed, the partner pays less than a quarter of their pay to the partnership profits or the partner doesn't have a significant amount of control over the partnership.

Junior partners are most likely to be affected as they tend to be guaranteed pay and also have less control over senior partners.

If more partners become ‘employees’, LLPs are at risk of going bust as firms will start having to pay higher taxes, like National Insurance. This will add pressure to cashflow and financial resource, sending firms already struggling over the edge.

If you are concerned about your firm and would like some insolvency advice, contact KSA’s expert lawyer, Grant Jones, on 07815 873370 or email him at grantj@ksagroup.co.uk.