HMRC published the draft Finance Bill 2014 last month. Included were changes to the taxation of certain partnerships. This article discusses the introduction of a new type of partnership member for Limited Liability Partnerships (LLPs) that will commence 6 April 2014: the “salaried member”.
The new status has been introduced to counter so-called “disguised employment” arrangements, where staff are elevated to the status of partners (also defined as members) of LLPs in order to benefit from self-employed tax status. The LLP employer also saves Class 1 NIC contributions.
HMRC have argued that the underlying relationship between the LLP and partners who fall into this category has not changed and that they remain, in essence, employees rather than partners – hence the description “disguised employment”.
From April this year all LLP members/partners will have to pass a new test to determine if they are salaried members. Members who are reclassified in this way will be treated for Income Tax purposes as employees of the LLP and subject to PAYE in the normal way. Salaried members will also be subject to the employee-related benefit in kind rules.
The status test will consider three conditions which need to be met for a member to be considered a salaried member:
- The member receives a fixed or variable sum that could be considered to be substantially (80% or more) disguised salary. Generally, this will cover arrangement where members’ “salaries” seem to be paid without reference to the underlying profit or loss of the LLP – as a whole.
- The member does not have, or cannot exert, “significant influence” over the management and affairs of the LLP as a whole, and
- The member’s capital contribution is less than 25% of the disguised salary in a year. This condition is further complicated if there are changes to capital contributions in the year.
From a planning perspective these definitions are uncertain in their application; particularly the second point: what constitutes “significant influence”?
LLPs with salaried members will be liable to employers’ NIC contributions, and the combined cost of the salaried member’s salary and employers’ NIC will be an allowable deduction in the LLP’s tax computation.
One thing is clear, all LLP partnerships should undertake a review of their members’ tax status before 6 April next year.