Finance Bill - new rules for partnerships tougher than expected

December 10, 2013

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By Mark Saunders

The new rules for partnerships are tougher than expected.  Partners will have to satisfy at least one of three tests to prove they are true partners in a business, eligible for a different tax treatment to employees. 

To keep their current status, at least a quarter of their pay must be profit dependent, they must have contributed at least 25% of their fixed pay to the firm’s capital, or the third option is to prove they have significant influence on the overall partnership. 

If partners are deemed to be employees then employer’s national insurance contributions at 13.8% is due and other employment-related tax rules, such as benefits in kind and share scheme rules, will apply. 

It makes sense that there's a clearer distinction between partners and employees, as there have been some partnerships set up purely to avoid tax and NIC. The new rules are tougher than expected and could make a big financial difference to junior partners. The Chancellor is making this change, along with mixed partnerships where there is a corporate partner, to raise over £1bn per year - so we’re talking about a significant amount for the firms and partners affected. 

We're likely to see even junior partners trying to justify that they have significant influence on the partnership, and it will be hard to prove either way with something so subjective.

Unfortunately, although the people affected will no longer be treated as partners for tax purposes, they won't get the employee law protections of ordinary employees, such as statutory redundancy pay.  So it’s all bad news for the salaried partners who are unexpectedly caught.

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