How can legal firms plan for partners’ and members’ tax season?

Partners’ and members’ tax season is upon us, and for many partnerships, this can be a bit of a minefield. Mike Stevenson, managing director at Iceberg, highlights some things to keep in mind.

Partners and members in firms are taxed based on their individual share of the partnerships’ profits for the tax year. This is pretty similar to how the self-employed pay tax – that is, each partner is billed as if they are a self-employed business. As profit in partnerships can be divided in any way that partners see fit, each partner will have a specific percentage of profit income assigned to them.

The way partners’ tax works means that tax and national insurance isn’t taxed from earnings at source and will instead be billed in the future. This nuance calls for careful planning, as partners’ and members’ tax can amount to a hefty bill to be paid in January – at a time of low client billing activity following the festive period, and a resultantly restricted cash flow.

So how can firms plan for tax season effectively to ensure a smooth process and minimum impact?

1. Understand what deadlines you’re working to

The deadline for partners to file their tax return is the same as the self assessment deadline – midnight on 31 January for digital submissions, and 31 October (three months earlier) for paper returns.

Missing the submission date is punishable with an immediate £100 fine, with additional charges applied for further delays. These can accumulate to become a significant fine, so it’s important to be aware of the deadline you’re working to and plan accordingly.  There has been a little leeway given by HMRC this year, but do be careful not to think this is a carte blanche to be late filing the returns.

2. Be aware of any complications or exemptions

Certain circumstances have slightly different rules when it comes to paying partners’ tax. For example, in the opening year of a partnership, the tax needs to be paid between the start date of the partnership and the end of the tax year.

Limited liability partnerships (LLPs) also have their own set of rules when it comes to paying tax, with salaried partners being taxed as employees if certain criteria can be met.

It’s important to be aware of potential exemptions, changes or complications when it comes to planning for partners’ tax so you don’t get caught out when filing your submission.

3. Planning, planning, planning

There is no doubt that the pandemic has created cash flow challenges for many firms. While a number of firms will have taken out loans and made the most of government backed schemes in order to ensure high liquidity during challenging times, many will now be commencing repayments.

Partners’ and members’ tax bills will be coming at a time of high outgoings for many partnerships, which is why it’s key to plan in advance how the tax will be paid, whether financing solutions are needed, and – if so – what options are out there?

4. Look at bespoke financing solutions

There’s a range of options available if you need to finance your partners’ and members’ tax, including bespoke funding solutions that are designed specifically for this purpose.  An example of this is an income tax loan, which offers a flexible way to spread the payment of your income tax liability.

There are numerous benefits to this, including flexible funding options, additional credit facilities, and the fact many funders, such as Iceberg, will make the payments directly to HMRC on behalf of a firm’s partners.