Limited Liability Partnerships face new tax rules from next week

Lawyers, accountants and other members of Limited Liability Partnerships (LLPs) will be subject to new rules1 from April 6th which could mean some of them being reclassified as employees for tax purposes and the LLP having to pay PAYE and employee and employer’s national insurance contributions (NICs) on their earnings.

The Chartered Institute of Taxation (CIOT) is advising any LLPs that have not already done so to review the status of all their members. While open to any area of business, the LLP structure is particularly popular among law, accountancy and financial services firms. The Government is pressing ahead with the introduction of the new rules next week despite a call from a House of Lords Committee to defer them until April 2015, in order to allow time to both better target the proposals and allow businesses to adapt.

Colin Ben-Nathan, Chairman of the CIOT’s Employment Taxes Sub-committee, commented:

“When is a partner not a partner? In HMRC’s view it’s essentially when their salary doesn’t vary with profits, they don’t have significant influence over the partnership’s affairs and they don’t have a substantial financial stake in the firm2.

“There has undoubtedly been some abuse of the current rules with, for example, cleaners and seasonal agricultural workers being made partners to avoid national insurance. So the Government were right to review the taxation of LLP members in the interests of fairness in the tax system.

“However it is disappointing that the House of Lords recommendations3 have been ignored and this has been pushed through so quickly. The proposed changes are not the same as those originally consulted on last year and we think that firms should have been given more time to consider the legislation in its final form, to determine whether it applies to them, seek advice where there is doubt and to make appropriate changes.”


Notes for editors:

1.       Government guidance on the new rules can be found here.

2.       The three conditions, which if all are met deem an LLP member to be an employee for tax purposes, are:

1)       That the LLP expects to pay the member a fixed profit share (or one that does not vary in line with the profits and losses of the LLP). If at least 20% of the amount the LLP would expect to pay to the member is dependent on the profits and losses the LLP makes then this condition is not met.

2)       The member does not have a ‘significant influence’ over the management of the LLP. If the member can have a significant say in how the business is managed this condition is unlikely to be met.

3)       The capital contributed to the LLP by the member is less than 25% of the expected “disguised salary” calculated in condition 1. So, if the capital introduced into the business by the member equals or exceeds 25% of the disguised salary  the test will not be met.

The new legislative test to determine whether a member of a UK LLP should be deemed to be employed (as a “salaried member”) for tax and NIC purposes is included in Finance Bill 2014. Although the Bill has still to pass through the parliamentary process and may be subject to change, the new rules take effect from 6 April 2014.

The rules have been changed from those originally announced last December to allow some time for LLP members to introduce capital into the business. LLP members at 6 April 2014 have 3 months to introduce capital if there is an undertaking already in place at 6 April. And those joining LLPs in future will have a 2 month period to contribute capital (again subject to there being an undertaking in place to provide that capital at the time they become a member).

For those LLPs that are uncertain whether the new rules apply to them, HMRC’s non-statutory business clearance process will not be available until after the Finance Bill receives Royal Assent. In the interim they will need to take a view on whether the new rules will apply and, if necessary, see if their HMRC customer relationship manager/co-ordinator will give some advice.

Where an LLP has members who, under the test, are salaried members then from 6 April 2014 the LLP is required to deduct tax and employee NICs (and account for employer NICs) under the PAYE system on any payments to or drawings by the salaried member.

If the LLP is not already an employer, or requires a separate PAYE scheme for its salaried members, the LLP will need to register with HMRC as an employer and start to report all payments to salaried members under the Real Time Information (RTI) reporting system ‘on or before’ payments are made to the salaried member. Furthermore, any non-cash ‘benefits’ provided to the salaried member will fall to be taxed under the benefit-in-kind rules that apply to employees. The LLP may, therefore, be required to complete a Form P11D at the end of the tax year and may need to review any P11D dispensation it has in place with HMRC.

3.       The recommendations of the House of Lords committee can be found here.

James Knell
External Relations Officer

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Chartered Institute of Taxation
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