HMRC have issued further guidance in respect of the LLP employment status of its members following the publication of draft legislation in the Autumn Statement in December 2013.
The new rules will treat a member of the LLP as an ‘employee’ if all three of the following conditions below are met.
Condition A –Disguised Salary
This is the key indicator for determining if an LLP member is a salaried member. The test is applied ‘looking forward’ on the basis of the arrangement in force at the time.
What would constitute a disguised salary:-
- An amount that meets any of the following requirements:-
- It is fixed; or
- It is variable, but varied without reference to the overall amount of the profits or losses of the LLP; or
- It is not, in practice, affected by the overall profits or losses of the LLP
- If 80% or more of amounts payable by the LLP to the member are for services this would constitute a disguised salary.
What wouldn’t constitute a disguised salary:-
- Any benefits firms might pay on behalf of members through the profit and loss account e.g. health insurance; cars etc. are not treated as part of the potentially disguised salary.
- Payments to a former active member of the LLP (i.e. one who provided services to the LLP in the past but is now ‘non serving’) do not constitute disguised salary payments.
- An individual’s profit share needs to be exposed to the variable profits of the whole business to avoid being treated as disguised salary. It is acceptable for those profits to be allocated based on a personal, team, or office performance basis.
- Drawings do not represent a fixed share, providing they are no account of anticipated profits and are ultimately repayable if such profits are not achieved.
Condition B – Significant Influence
This condition is met if the mutual right and duties of the members and the LLP do not give the member significant influence over the affairs of the partnership.
The legislation refers to those individuals who do not have significant influence, i.e. those that merely work in the business rather than carry it on. Examples of those who do have a significant influence include those who are involved in the management of the business as a whole, or senior members of a firm who may have little interest in day-to-day management which they leave to others but their roles and rights mean that they can exert significant influence over the business as a whole.
Condition C – Contribution
This is the condition of choice for law firms to focus on.
This condition is met if the members contribution to the LLP is less that 25% of the disguised salary and it is reasonable to expect that it will be payable in a relevant tax year in respect of the members performance of services for the LLP.
HMRC’s guidance states that providing by 6 April 2014 there is an unconditional requirement for members to contribute capital funding and that capital funding is actually in place within 3 months of 6 April 2014, then this will count in terms of measuring a members’ capital of the purposes of this condition.
There is a similar relaxation for new members who join after 6 April 2014. They will have 2 months to introduce capital after their appointment providing the requirement to contribute is also unconditional from the date they become a member.
The guidance clarifies that current account balances, undrawn profits, tax reserves and sums the member can recall at their discretion do not constitute capital.
Members meeting all 3 conditions
If all three conditions are met by a member then that individual is a salaried member and will be treated as an employee for tax purposes, subject to PAYE and tax on any benefits in kind.
The Gov.uk website provides full guidance on LLP salaried members as well as examples for each condition.
For further information or guidance on any of these points you can contact James Tregay on 01872 271655 or via email at email@example.com