The Government has issued draft anti-avoidance legislation to be included within the Finance Bill 2014, which overrides the current presumption that a member of an LLP is self-employed for tax purposes and is not an employee. This is in response to HMRC concerns that individual members of LLP's are benefiting from being treated as self-employed for tax purposes, in circumstances where those members are effectively in the position of an employee.
The details which have been released include draft legislation, together with a Technical Note and Guidance from HMRC. The new rules will take effect from 6th April 2014 and will apply to all UK LLP's, but will not apply to general or limited partnerships or to LLP's formed under the law of jurisdictions outside the UK.
Under the new rules, a member of an LLP will be treated as "a salaried member" (i.e. employed), unless he fails any of the following three tests:-
A. The member is remunerated for his services "wholly or substantially wholly" (80% or more) with "disguised salary". Disguised salary is remuneration which is either fixed or, if variable, the variable element does not relate to the profits of the LLP as a whole. Therefore in order to fail this test, at least 20% of a member's profit share must be directly linked to the overall profitability of the LLP.
B. The member does not have significant influence over the affairs of the LLP. "Significant" has not been defined, but we believe that any LLP with more than a very small number of members is likely to be judged as being too big for any member to have "significant influence".
C. The member's capital contribution is less than 25% of his annual "disguised salary" (as in A above). This test must be met from year to year, so e.g. an increase in fixed pay may require a further top up capital contribution to avoid it applying.
The consequences of being treated as a salaried member are potentially wide ranging: significant incremental National Insurance, the requirement to deduct tax at source and associated cash flow disadvantage, administration of P11d's and other payroll reporting, potentially the triggering of pensions auto enrolment, to name a few.
There are also some anti-avoidance rules designed to prevent schemes aimed at getting round these conditions. One such example given by HMRC, is of a member who makes a capital contribution, but is funded by a non-recourse loan which is ultimately backed by the LLP.
The Finance Bill 2014 is currently going through Parliament. However, it is thought unlikely that there will be any substantive changes to the draft legislation that has been issued.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice.
