Routinely used by financial advisory firms since their introduction in the UK in 2001, limited liability partnerships (LLPs) combine the flexible structure of a partnership with the benefits for its members of limited liability.
There are also tax and cashflow advantages. There has been a presumption for tax purposes that LLP members (often referred to as partners) are self-employed, which attracts National Insurance contributions (NICs) at a fraction of the rates paid for employees. However, as part of its clampdown on ‘disguised salaries’, HMRC introduced new rules to reverse this in April 2014.
This was quickly followed by a Supreme Court decision on the status of an LLP member. It held that a junior equity partner of a law firm was a ‘worker’. The claim concerned whistleblower protection, but has much wider implications, affording much greater rights to LLP members.
From 6 April, if certain conditions are met, a partner is treated as employed by the LLP for tax purposes. PAYE and income tax on benefits will arise, but the additional cost of employer NICs, payable at 13.8 per cent of remuneration, is the key concern.
The rules on disguised salaries also apply to a member performing services for the LLP through a personal service company that is a member of the LLP (and corporate members could be prohibited, anyway, following the Department for Business Innovation and Skills’ imminent consultation).
Confusion
There is a lack of clarity in certain areas, such as what amounts to a “significant influence” over the affairs of the LLP. For many members of large LLPs, it is unlikely that they could be said to have such an influence. HMRC is, however, likely to accept that FCA-approved members holding CF3 (chief executive) and CF8 (apportionment and oversight) status
do have significant influence, although not necessarily those holding CF4 (partner) status.
The short timeframe between the publication of the draft legislation and the changes taking effect meant that many LLPs did not have the opportunity to adequately review or reorganise their management structures or voting rights, and/or reconfigure their remuneration structures to fall outside disguised salary rules 1 and 2 (see box), and were forced to require their partners to increase their capital contributions (which cannot include tax reserves or loans repayable before the member leaves).
As the dust settles, many firms are now re-evaluating or changing their arrangements and the extent to which their members do or could have significant influence over the affairs of partnership, and/or the extent to which their remuneration can be said to be affected by the overall amount of the LLP’s profits or losses.
Partnership deeds also need to be amended to reflect the fact that the conditions are tested at the start of each tax year, when an individual first becomes a partner and whenever there is a change in circumstances affecting the condition.
According to HMRC, the tax treatment of members should not affect their employment status, but it may be unrealistic not to expect some ‘creep’ to occur and the recent Supreme Court ruling that an LLP member was a worker has already moved the goalposts.
