In the past members of an LLP were automatically deemed to be self-employed.
As a result, a number of businesses have taken advantage of this to make people (who in normal circumstances would be treated as employees) members of the LLP so as to save employers’ National Insurance. These quasi members/ employees would typically hold little of nothing in the way of voting rights of the partnership or involvement in the overall strategy of the business.
As a result of the new legislation introduced in 2014 it is now possible to have both employed and self-employed members of an LLP. Clearly this could have a significant impact on the tax status of existing members and significant amounts of employers National Insurance may be due as a result.
In order to determine whether the new rules affect you (‘M’ in the statements below), you should consider carefully review the following three conditions. If ALL THREE of the conditions are met you are at risk of reclassification from self employed to employed status.
Condition A “Arrangements are in place as a result of which M is to perform services for the LLP in his capacity as a member of the partnership and it is reasonable to expect that the amounts payable by the LLP in respect of M’s services will be wholly or substantially “disguised salary”
Disguised Salary Definition
An amount which is;
If it is variable it is varied without reference to the overall profit/ loss of the LLP or
It is not in practice affected by the overall amounts profits or losses of the LLP
HMRC have also given further guidance which indicated that the new rules will be deemed to apply where it is reasonable to expect that at least 80% of the amounts payable by the LLP for the Members services will be disguised salary.
Condition B “The mutual rights and duties of the Members of the LLP and of the partnership and its Members do not give M significant influence over the affairs of the partnership.
It is insufficient that the individual works for the business- the individual should BE the business. It is not sufficient to attend board meetings/ vote to sign off accounts. HMRC are looking for significant influence over the business as a whole rather than individual components of it.
Condition C “At the relevant time M’s contribution to the LLP is less than 25% of the total amount of disguised salary which is reasonable to expect will be payable in the relevant tax year by the LLP in respect of M’s performance of services as a Member of the LLP.”
The relevant time = the start of a new tax year.
The amount of capital contribution for the purposes of condition C is based on the amount that the individual has invested as capital
does not take into account sums that the individual may be called upon to pay at some future date/ undrawn profits or amounts held by the LLP on behalf of its members (i.e. to pay tax)