Salaried members of an LLP

HMRC published the draft Finance Bill 2014 last month. Included were changes to the taxation of certain partnerships. This article discusses the introduction of a new type of partnership member for Limited Liability Partnerships (LLPs) that will commence 6 April 2014: the “salaried member”.

The new status has been introduced to counter so-called “disguised employment” arrangements, where staff are elevated to the status of partners (also defined as members) of LLPs in order to benefit from self-employed tax status. The LLP employer also saves Class 1 NIC contributions.

HMRC have argued that the underlying relationship between the LLP and partners who fall into this category has not changed and that they remain, in essence, employees rather than partners – hence the description “disguised employment”.

From April this year all LLP members/partners will have to pass a new test to determine if they are salaried members. Members who are reclassified in this way will be treated for Income Tax purposes as employees of the LLP and subject to PAYE in the normal way. Salaried members will also be subject to the employee-related benefit in kind rules.

The status test will consider three conditions which need to be met for a member to be considered a salaried member:

The member receives a fixed or variable sum that could be considered to be substantially (80% or more) disguised salary. Generally, this will cover arrangement where members’ “salaries” seem to be paid without reference to the underlying profit or loss of the LLP – as a whole.
The member does not have, or cannot exert, “significant influence” over the management and affairs of the LLP as a whole, and
The member’s capital contribution is less than 25% of the disguised salary in a year. This condition is further complicated if there are changes to capital contributions in the year.
From a planning perspective these definitions are uncertain in their application; particularly the second point: what constitutes “significant influence”?

LLPs with salaried members will be liable to employers’ NIC contributions, and the combined cost of the salaried member’s salary and employers’ NIC will be an allowable deduction in the LLP’s tax computation.

One thing is clear, all LLP partnerships should undertake a review of their members’ tax status before 6 April next year.

Private Use of Company Assets

Where employees are provided with living accommodation, a car or a van, any private use is usually subject to specific scale charges or other rules. This article considers the provision of two further classes of assets provided for an employee’s or director’s personal use.

The cash equivalent of the asset provided is the annual value of the asset’s use, plus expenses (other than costs of acquisition) incurred in connection with the asset that would not have been incurred without the provision of the benefit.

Land: the annual value of the asset’s use is the greater of the gross rateable value when the property was last rated, and any rent paid by the provider.
Assets other than land: the annual value of the asset’s use is equal to 20% of the asset’s market value when it was first used to provide a benefit. If the provider paid rent for the asset that was more than the 20% calculation, then the higher figure is used.
If an asset is provided for part of a tax year the above cash equivalent figures would be adjusted accordingly.

For example:

A company buys a boat for a director’s private use on 6 April 2013 for £25,000. It takes out a loan to buy the boat and interest charges are £4,500 in the year to 5 April 2014.

Running costs paid by the employer in the year are £2,400 and the director makes a contribution of £1,500.

The benefit would be £5,900 (20% of £25,000 plus expenses £2,400, less £1,500 made good by the director).

The bank interest charges are disregarded as they are part of the cost of acquisition.

Tax planning for the year to 5th April 2014

Income Tax

Although we are now at the beginning of a new calendar year we are in the last quarter of the current tax year.

Whether you are a business person, property landlord or pay significant amounts of tax as an employed or retired person there is now a short window of opportunity to examine your likely earnings for the 2013-14 tax year and, more importantly, see what can be done to minimise those liabilities.

It is impossible to outline all of the possible tax planning issues that could be of benefit. We have listed below a few and would suggest that you give us a call to discuss your individual circumstances.

Have you maximised your ISA investments this year?
Have you maximised your pension contributions?
If possible have you utilised your Capital Gains Tax personal exemption? Currently £10,900 for 2013-14.
If your employer still pays for the private fuel used in your company car you can effectively avoid the car fuel benefit charge if you repay your employer for the private fuel before the end of the tax year. It may be worth crunching the numbers as the tax on the benefit in kind is expensive and the private fuel refund may be less.
For Inheritance Tax purposes each person can give £250 a year to any number of recipients, as well as £3,000 annually over and above that amount. They can also make regular gifts out of their income (not capital) that should fall to be exempt.
If you are married or in a Civil Partnership and one partner/spouse has a much lower level of earned income, consider transferring income producing assets to the lower income earner. With Income Tax rates at a maximum 45% this current tax year, savings could be significant.
If you or your partner/spouse are affected by the Child Benefit claw back for high income earners, have you considered equalising your income (if possible) to avoid the charge, or have you considered your obligation to file a Self Assessment tax return to disclose your liability?
If your income is likely to exceed £100,000 this tax year have you considered the potential reduction or loss of your personal tax allowance?
If you are a high income earner paying tax at the 45% additional rate could you take advantage of charitable donations reliefs or other planning opportunities to defer, reduce or eliminate the impact the 45% rate?
Is it likely you will have business tax losses for 2013-14?
As indicated above every person’s circumstances are different and the above list is by no means exhaustive. Please call if you would like to organise a review of your tax planning opportunities for 2013-14.

Tower to Tower Blackpool to Paris

The ride from Blackpool Tower to the Eiffel Tower is to start on Saturday July 20th from Blackpool arriving in Paris on Saturday 27th July. More details on http://www.justgiving.com/TowerToTowerOn2Wheels

Confirmed Route : (All Distances are approximate)

Day 1: Blackpool to Manchester – (51.46 miles)

Day 2: Manchester to Barlborough – (60.94 miles)

Day 3: Barlborough to Huntingdon – (94.5 miles)

Day 4: Huntingdon to Northfleet – (89.63 miles)

Day 5: Northfleet to Calais – (90.97 miles)

Day 6: Calais to Amiens – (100.69 miles)

Day 7 : Amiens to Chantilly (71.4 miles)

Day 8: Chantilly to the Eiffel Tower cia the Champs Elysee – (31.75 miles plus a celebration evening dinner cruise along the Seine)

 

This 30 mile section could have been tacked onto day 7. The idea is to arrive in Paris exhilarated and ready to party, not knackered and ready for bed !

Importance of being accurate with your tax return

 

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Termination payments

In a recent First-tier case the Tribunal considered the tax treatment of a businessman who was paid £123,750 on the termination of his employment. He dutifully deducted the usual £30,000 tax-free amount from this payment and declared the difference on his tax return.

Unfortunately, the termination payment was paid under the terms of his contract of employment. Payments made in this way are considered to be part of remuneration and therefore taxable in full.

The £30,000 deduction was not, therefore, available.

The case points to the need for constant vigilance when drafting contracts of employment to ensure that the £30,000 exemption is not invalidated. Even a “thank you for your services” letter can cause problems. Do seek our advice if you wish to make use of the exemption: either as an employee or employer.

Cars LLP and company

In a potentially wide ranging decision, a First-tier Tribunal has ruled in favour of HMRC.

The case involved an LLP partnership that was formed to provide management services to a company. The following details are of interest:

As part of the arrangement the LLP owned and provided the use of cars to the partners. This included private fuel.
The partners were also directors of the company, or were family members of the directors.
The partners had a minimal role in the running of the LLP.
The LLP only had one customer, the limited company.

The Tribunal considered and reached the following decisions:

That the LLP’s business would have survived without the provision of cars to the partners.
That all of the car running and acquisition costs were recouped from the company as part of a management charge.
That the terms of business between the LLP and the company did not reflect those of independent parties acting at arm’s length.

The Tribunal decided that the use of the cars by the partners of the LLP was made available due to their employment as directors of the company. Accordingly, the directors should be taxed on the use of the cars as a benefit in kind – the company was also liable to pay Class 1A NICs.

It would seem that there is an effective element of double taxation on the private element of motoring costs – but, in the words of the Tribunal, the taxpayers have “to live with the consequences of that”.

It is not clear at this point if the case will be appealed by the defendant. As things presently stand the case does offer HMRC an opportunity to challenge similar arrangements. The general circumstances of this case are quite specific, though by no means rare, but partnerships that are genuinely “standalone” will not be affected.

Tax Investigations – the dash for cash

We provide insurance for our clients to cover the cost of professional fees in the event of a tax investigation. The company which provides this cover has revealed that their data shows HMRC has started twice as many tax enquiries last month as they did in June 2009. It seems HMRC have been instructed to ‘dash for cash’.

The full text follows;

Our Consultants deal with hundreds of HMRC enquiries at any given time and as a result speak with Inspectors across the whole of the UK on a day to day basis. In the last couple of weeks, we have identified a new initiative within HMRC which appears to be known as the ‘Dash for Cash’.

The Inspectors we have spoken to have told us they are being tasked to bring in as much money as possible, as quickly as possible, which is not really surprising given the current economic environment.  We understand there will be pressure to settle long running full enquiry cases and Inspectors will be encouraged to take up aspect cases which are likely to be settled more quickly to optimise the tax yield in the current fiscal year.

We have also heard from several regions that HMRC will be going back to ‘single’ case working as the new ‘Cross Tax’ enquiry framework is not working as they envisaged and is slowing up the enquiry process so it is likely that they will be reverting back to ‘where we were’!

Finally, our Claims Team received twice as many claims in June 2010 as they did in June 2009, confirming that HMRC are ‘on the move’ again and we are expecting that enquiry levels will continue to increase over the coming months.

Beneficial loans to employees or directors

Assorted international currency notes.
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If a company makes a loan or loans to an employee or director and the combined outstanding value to an individual never exceeds £5,000 there is no personal tax or National Insurance contributions to pay. However, beware; loans to employees who are also shareholders and directors may create a corporation tax charge for the company even if the loan does not exceed £5,000.

If the combined amount exceeds £5,000 a potential benefit in kind charge may arise if no interest is charged to the loan account or interest is charged at a lower rate than the official rate published by H M Revenue & Customs.

The official interest rates for the last three years are:

From 6 April 2007 to 28 Feb 2009 – 6.25%

From 1 March 2009 to 5 April 2010 – 4.75%

From 6 April 2010 – 4%

As we are now approaching the deadline for filing forms P11D, the forms that declare employees’ and directors’ benefit in kind, it is essential that loans are examined to reveal any benefits due. Overdrawn directors’ loans can create difficulties where the amount of loans fluctuates during a tax year.

If you would like clarification on the amount of benefit in kind you may have to pay please contact us as soon as you can. P11Ds have to be filed by 6 July 2010.

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Tax free long service awards

As the name suggests, tax free long service awards are tax efficient. If you provide an employee with a non-cash award to reward long service, the payment can be made without deduction of tax or National Insurance contributions, as long as the following criteria are observed:

  1. As this is a reward to employees it is not available to self-employed sole traders or partners. It is available to directors who receive a salary for their services.
  2. The award has to mark at least 20 years of service.
  3. You must not have made a previous long service award within the last ten years.
  4. The value of the reward cannot exceed £50 per year of service – so the maximum value of an award to an employee with 20 years of service is £1,000.
  5. As pointed out in the opening paragraph of this article the award has to be made in a non-cash form. Cash awards are taxable as earnings in the usual way. You should also be wary about awards that can quickly be converted into cash, for example marketable stocks or shares or precious metals – these do not fulfil the non-cash criteria.

There are a number of complicated rules to abide by if your payment falls outside the above five points – for instance if you exceed the £50 per year or if the employee has less than 20 years of service.

If you are thinking of making use of this potential tax-free perk it is best to check with us before making the award.

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