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UK LLP tax changes 'good news', says Menzies

Firms to benefit from improved cashflow and more motivated partners

7 January 2014

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By Manju Manglani, Editor (@ManjuManglani)

Planned changes to the taxation of fixed-share partners in UK LLPs will be good news for law firms, a regional accountancy firm has argued.

Peter Noyce, head of professional services at Menzies, has suggested that law firms will benefit from higher capital contributions from partners, reduced drawings and a more engaged partnership.

Under the government’s proposals, from 5 April 2014, partners in LLPs will not be deemed employed if their capital contribution is more than 25 per cent of their expected profit share. Firms could consequently have a sudden boost in cashflow in the current financial year.

“Many partners will choose to inject capital into the LLP to protect their self-employed status. This would immediately give firms a more robust capital base, a stronger balance sheet and improved working capital,” said Noyce.

“This could also lead to a more for focused and engaged fixed share equity partner that suddenly has capital ‘at risk’ and therefore perhaps becomes even more motivated for their practice to succeed.”

Firms may also be encouraged to adopt a more prudent approach to drawings as a result of the proposed tax changes, Noyce said, pointing to the fact that one of the criteria for avoiding employed status is that partner remuneration should depend on the firm’s profits.

“Firms that cannot meet the capitalisation requirement may instead decide that the easiest way to protect their partners’ self-employed status is to adopt a remuneration scheme that genuinely depends on profitability,” he added.

“This would force firms to impose far stricter rules regarding drawings throughout the year. It would improve working capital and cashflow, especially at the pinch points of tax and VAT payment dates.”

Ironically, the draft legislation will bring more firms in line with the Solicitors Regulation Authority’s (SRA’s) guidance on financial stability.

“I very much doubt those drafting the legislation at HM Revenue & Customs were thinking of good practice and the SRA’s concerns about financial stability. But in a strange way they could end up being incredibly and remarkably complementary.

“I imagine that [the SRA] would be delighted if the by-product of the draft tax provisions is better-capitalised law firms,” he concluded.

 

 

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