Ever since LLPs were introduced it has been HMRC’s practice to treat all members as self-employed even if they would otherwise have been regarded as salaried partners/employees. This led to significant numbers of individuals being made members of LLPs because of the significant National Insurance Contributions savings which were possible. Perhaps with this in mind, HMRC announced in March 2013 that it was concerned about the manner in which salaried members of LLPs were taxed when their role, responsibilities and behaviour were more similar to those of employees rather than equity partners.
Following this announcement draft legislation has now been published which articulates HMRC’s proposals in more detail and which usefully indicates the tests which will apply to determine if salaried partners should be treated as employees.
The proposal is that where, in respect of a member (M), three conditions are met, that member is to be treated as an employee for income tax and corporation tax purposes and PAYE should be deducted from amounts paid to that him or her. The three conditions as currently drafted are:-
- Condition A – The income condition – M’s share of the profits of the LLP is wholly or substantially fixed, or if variable, variable without reference to the overall profits of the partnership;
- Condition B – The influence condition – The mutual rights and duties of the members do not give M significant influence over the affairs of the LLP; and
- Condition C – The risk / investment condition – M’s investment in the LLP is less than 25% of M’s reasonably expected annual income from the LLP.
The proposed changes are to come in to effect from 6 April 2014, but LLPs should be careful in considering that date in relation to their accounting date e.g. a LLP with a December year end might think that this is a matter for consideration in December 2014 i.e. at the end of the accounting period finishing after 6 April 2014, but that is not the case.
LLPs should be mindful that under Real Time Information (“RTI”) all payments to employees should be reported to HMRC at the time they are made and therefore it is the first payment to those members that are determined as employees after 6 April 2014 that will be reportable to HMRC. Therefore, if it is reasonable to expect that conditions A, B and C above will be satisfied in respect of a member, then the draft legislation would require that the member be treated as an employee from 6 April 2014.
As the proposed legislation has only recently been released for consultation, it is almost certain that this will be another piece of legislation that will be effective before its final provisions are known, but we would suggest that members of LLPs review their arrangements based on the draft legislation without delay.