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HMRC LLP rule change – Kennedys calls on fixed-share partners for 30% capital injection

Kennedys has become the latest UK firm to call on its fixed-share partners (FSPs) to make a 30% capital contribution in light of HM Revenue & Customs’ (HMRC’s) decision to overhaul the way salaried partners are taxed, giving the firm some ‘headroom.’

The top 30 UK firm was in consultation with its partnership in January, which went to a vote, after which the firm decided its FSPs should contribute 30% of their earnings, 5% above the amount required under the new HMRC rules.

The rule change dictates that partners in limited liability partnerships (LLPs) with less than 25% of their salary attached to the equity will be viewed as having a ‘disguised salary’ and taxed as an employee, including National Insurance, meaning higher salary costs for LLPs.

Kennedys chief executive officer Guy Stobart told Legal Business: ‘We tried to keep it [the contribution] as tight as possible, but we would like some headroom.’ Stobart added that the contribution will be used as part of the firm’s ‘working capital’, and declined to be drawn on whether it would use the money for strategic development. The new rules prohibit firms paying the capital injection off against existing debt.

Legal Business understands that the request for cash will affect around 100 of the firm’s non-equity partners from legacy Kennedys. The firm merged with aviation practice Gates & Partners on 1 June last year creating a 176-partner firm.

In April this year Hogan Lovells called its 65 non-equity members to contribute capital of around £60,000 to £100,000 each. Capital investment by salaried partners – which will total between £3.9m and £6.5m – will save the firm having to pay more in tax in respect of national insurance, and the firm said today (3 April) that loans will be available to salaried partners from the firm’s banks on the same terms as those available to equity members.

Also in April, CMS Cameron McKenna call upon its fixed-share partners to contribute around £35,000 to £50,000 each, bringing in a total capital investment of up to £4.5m.

A partner at the firm told Legal Business: ‘The firm doesn’t necessarily need the money – it’s not a call for borrowings or to meet debt requirements. It’s a call to even out the capital positions across the various levels of the partnership. People were not necessarily happy taking on more borrowings but it hasn’t caused any ructions across the junior partnership.’