Tag: partnerships tax

Partnerships with corporate partners eligible for full expensing

Posted on by Alicia Sprott

HMRC confirmed in early 2024 that partnerships with corporate partners (also known as mixed partnerships) are now able to claim capital allowances which have previously only been available to companies within the charge to Corporation Tax.  The capital allowances are first year allowances such as full expensing.

Full expensing allows companies (and partnerships with corporate members) to immediately deduct the entire cost of qualifying capital expenditures from their taxable income, in the year of purchase. This contrasts with traditional capital allowance methods, where the cost is spread out over several years. For partnerships with corporate members, investments in assets, such as machinery, equipment, or vehicles, can result in receiving tax relief (at up to 25%) on these investments immediately, which can alleviate the cash flow issues of investment. Consequently, more funds become available for reinvestment in the business or distribution to partners.

In conclusion, partnerships with corporate members in the UK stand to benefit significantly from full expensing.

Tax implications

The implications of these tax incentives are extensive for partnerships. By encouraging investment in critical assets, the Government aims to foster business growth and competitiveness. For partnerships with corporate members, these incentives translate into enhanced financial performance and increased flexibility in capital allocation. With reduced cash flow constraints, partnerships have the opportunity to invest in innovation, expansion, or infrastructure improvements, all of which can contribute to long-term success.

However, to fully capitalise on these incentives, partnerships must ensure compliance with relevant tax regulations. This involves accurately identifying qualifying capital expenditures, maintaining thorough records, and adhering to reporting requirements set by HMRC legislation. Given the complexity of tax planning, partnerships may benefit from seeking guidance from tax professionals or accountants to navigate the intricacies of these incentives and optimise their tax strategy.

In conclusion, partnerships with corporate members in the UK stand to benefit significantly from full expensing and super-deductions. These tax incentives provide valuable opportunities for partnerships to enhance their financial position, drive investment, and contribute to economic growth. By leveraging these incentives effectively and ensuring compliance with regulatory requirements, partnerships can position themselves for sustained success in an increasingly competitive business environment.

For advice on these issues and capital allowances for partnerships generally, please contact Kiran Chotai, Private Client Senior Manager.

The importance of a partnership agreement

Posted on by Alicia Sprott

Partnerships can raise some of the following questions:

  • What happens in the event of a dispute between the members, if there is a claim made against a member or even how the business is perceived?
  • What if the members are of the same family?

There is often more than just tax and legal factors to consider, and the partnership agreement is a good starting point.

Partnership agreements

There is plenty of case law to suggest that the actual facts, actions of the parties and the circumstances can play a part in deciding whether it exists or not. Not only that, but a poorly drafted agreement may have an outcome not originally intended.

Whilst there is no requirement to have a partnership agreement, and even where an oral agreement can suffice, formalising a partnership with a documented partnership agreement has two clear advantages:

  1. Firstly, it focuses the parties’ minds on the nature of the transaction, and if the situation as to whether a partnership exists is borderline, the agreement may decide the matter.
  2. Secondly, there are sound practical reasons for putting the arrangement in writing to ensure that the subsequent business transactions are what the parties agreed to at the outset. This could include, for example, where the parties disagree on a matter, or their profit-shares may cease to reflect their continuing contribution, appointing new members or expelling disruptive members.

We should also keep in mind that in the absence of a partnership agreement, or in cases where something is not covered by one, we default to the rules as set out in the Partnership Act 1890, which may not give the results the parties intend.

Main contents of a partnership agreement

There are many points that will need to be covered and some will vary according to the type of business and the relationship between the members.

However, the agreement should be clear on whether there is a partnership and how the arrangement is to work. Some agreements run into hundreds of pages whereas others are just a few pages long. In general, factors such as how the members will share income and capital profits, what happens on the death of a member, putting restrictions on exiting partners, capital contribution requirements, and more will all need to be considered.

A small investment in legal and tax advice at inception can protect the partnership against a much more expensive battle if the parties later decide to split up. For further advice, contact Kiran Chotai, Private Client Senior Manager.

Transitioning from employee to partner

Posted on by Alicia Sprott

Employment status

As an employee, you are taxed on the income received each month (or other agreed period), with Income Tax and NI deducted at source through the payroll under Pay As You Earn (PAYE). As a partner, you are taxed on your share of the profits of your partnership, based on your agreed profit-sharing ratio. This may differ from your drawings.

When you become a partner however, you will be required to file an annual Self-Assessment tax return and are likely to be required to make tax payments on account, twice a year:

  • On 31 January (within the tax year)
  • On 31 July (after the tax year ends)

Each payment on account is usually 50% of the previous tax year’s liability. In addition, a balancing payment may be due on 31 January following the end of the tax year.

National Insurance Contributions

As an employee, you are subject to Class 1 National Insurance Contributions (NICs). In 2024/25, the rate for earnings between £12,570 per year and £50,270 is 8%, with earnings in excess of £50,270 at a rate of 2%. Your NICs are deducted from your salary by the employer.

However, as a partner, from 2024/25, you will be subject to Class 4 NICs. It is also possible to pay Class NIC, voluntarily.

For 2023/24, Class 4 NICs are paid at 6% on your annual taxable profits between £12,570 and £50,270, and a further 2% on profits over £50,270.

During the year of transition, you are likely to have paid Class 1 NICs on your employment income. Where an individual is both employed and self-employed in a tax year, the ‘annual maxima’ is calculated to allow for relief for the individual who is essentially paying Class 1 and Class 4 NICs in one year.

Benefits and expenses

Any benefits you receive as an employee are either reported through payroll or via a P11D form. Any benefits you receive as a partner are disallowed within the firm’s tax computation, therefore no tax relief is obtained.

As an employee, your employer would normally reimburse business expenses on the basis that the expense is directly related to your employment. When you become a partner, it is similarly important that all business expenses are accounted for in the partnership’s annual tax return.

Pension

As an employee, you are usually part of the workplace pension and employee contributions are complemented by the employer’s contributions. As a partner, you are solely responsible for your own pension and there are no employer contributions. It should be noted that in the year of transition, caution should be taken as you will need to ensure you do not exceed the pensions annual allowance. Pension contributions in excess of the annual allowance of £60,000 can result in a tax charge at your marginal rate (up to 45%). This allowance is reduced for higher earners.

Registering as a partner

To begin the transition to a partner, an SA401 form should be completed by the individual joining the partnership.

If you would like to discuss your transition from employee to partner in more detail, please reach out to Kiran Chotai, Private Client Senior Manager, or your usual haysmacintyre contact.

LLPs: HMRC’s new salaried members rules guidance on capital contributions

Posted on by Alicia Sprott

The rules tax the members of an LLP as employees if three conditions are all met:

  • Condition A: it is reasonable to expect that at least 80% of an individual member’s total remuneration is ‘disguised salary’ (which does not vary or which varies but without reference to the LLP’s profits);
  • Condition B: the individual member does not have significant influence over the affairs of the LLP; and
  • Condition C: the individual member’s capital contribution is less than 25% of the disguised salary that it is reasonable to expect will be payable to him in the relevant tax year.

Failure to meet one or more of these three conditions means that the relevant member will be taxed as self-employed rather than as an employee, which can result in a significant saving of employer’s National Insurance (NI). Alternatively, where salaried members are taxed as employees and their income forms part of the employer’s tax bill, it will also be subject to the Apprenticeship Levy (0.5%), where the employer’s annual total pay bill is £3m or more.

HMRC’s new guidance

HMRC has recently changed its guidance on the interaction of the targeted anti-avoidance rule (TAAR) and Condition C. The TAAR states that any arrangements must be disregarded if those arrangements , ensuring that salaried members rules do not apply.

Until recently, HMRC’s guidance did not preclude LLPs from requiring capital contributions of 25% or more, in order to ensure that Condition C was not applicable. HMRC has, however, amended its Partnership Manual to remove this assurance and to insert an example suggesting that the TAAR applies where a capital contribution is increased with a view to avoid meeting Condition C.

Why the change in stance?

Whilst we can’t be certain, we understand that HMRC’s change of stance was prompted by the recent case of HMRC v BlueCrest Capital Management (UK) LLP. The recent changes to HMRC’s guidance indicates that it is taking a wider view of how and when the TAAR will apply.

The changes to the guidance will be of immediate concern to LLPs and members who have arrangements in place, which apply incremental movements in capital, as these arrangements may now trigger the TAAR. LLPs must ensure they have a robust process in place and assess each member against all three conditions on a regular basis, and at least before the start of each tax year.

However, we must note that the change is only to HMRC’s guidance, not a change to the legislation or case law. HMRC’s guidance will remain relevant to arrangements put in place before the recent change.

How we can help

We can help you review current arrangements to determine if you are compliant with the legislation, to identify if there is a greater risk of HMRC challenge – given its change in guidance – and to mitigate any risks identified.

For more information or to discuss the above, please get in touch with your usual haysmacintyre contact, our Employment Tax team, or our Partnerships Tax team.

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