Nonequity law firm partners have become an endangered species in the United Kingdom, thanks to radical new tax rules for limited liability partnerships (LLPs). Law firms across the country—including the London offices of some top U.S. firms—are asking salaried partners to contribute equity for the first time as firms scramble to restructure their partnerships or face tax bills that could rise by millions of pounds per year.
Under the new Finance Bill, which takes effect on April 6, partners at U.K. LLPs who satisfy three criteria—including having little or no share in the firm’s equity—will be regarded as having a “disguised salary” and will be treated as employees for tax purposes [see "The Partner Test," below]. That means that firms would have to pay employers’ national insurance contribution for those partners at a rate of 13.8 percent of their gross salary—which for salaried partners in the U.K. often exceeds £200,000 ($335,000) per year—and would also have to finance the payment of monthly income tax. A senior partner at one U.K. top 30 firm says that a reclassification of its nonequity partners as employees would cost the business more than £1 million ($1.67 million) per month.
