NIC changes included in partnership review

HMRC has updated its Tax information and Impact Note about its review of partnership taxation to take account of feedback it has received on the proposed measures to deal with disguised employment and profit and loss allocation in partnerships, reports accountancy services Harris & Co.

The update relates to two proposed changes to the NICs rules, one relating to disguised employment, and the other to profit deferral under Alternative Investment Fund Managers Directive (AIFMD).

As regards disguised employment through the use of LLPs, HMRC says the proposed changes will prevent LLPs and their members from benefitting from the default partner status of all individual members by disapplying the presumption of self employment and ensuring that LLP members who meet defined conditions are treated as employees for income tax and national insurance purposes.

This means that ‘salaried members’ in partnerships will be categorised as employed earners and will pay NICs on that basis

During the consultation earlier this year, HMRC says it identified a tax issue relating to the interaction of the AIFMD and the existing partnership tax rules on those alternative investment fund managers who operate as a partnership.

The interaction of the AIFMD and current tax rules means that partners will be subject to tax and national insurance on certain profits they cannot access in the base year because these profits will be deferred to 3-5 years in accordance with the AIFMD rules.

HMRC is now proposing that a statutory mechanism will be introduced to address this issue without allowing the continued use of corporate partners, as this would give rise to tax advantages which the second strand of the partnerships measure will prevent. As part of this statutory mechanism, it is proposed to introduce a power that will allow changes to be made to the NICs rules to facilitate this mechanism.

The new tax and NICs legislation required for this mechanism will take effect from 6 April 2014, alongside the new legislation required to tackle disguised employment through LLPs and other changes to be introduced under the partnerships review.