One of the many benefits of being a member in a Limited Liability Partnership (“LLP”) is the prospect of not being subjected to at source income tax deductions (PAYE) on your salary and bonus payments, which is the case for employees in a limited company. In comparison, a member in an LLP must meet their income tax liabilities through a self-assessment tax return. This is also beneficial from the LLP’s perspective as they are not liable to pay employer’s National Insurance (2017: 13.8%) on member drawings.
However, following the announcement in the Finance Bill 2014 effective from 6 April 2014, the “Salaried Members Rules” were introduced to capture any members that were in effect providing services on terms similar to an “employee” and should therefore be treated as an employee for tax purposes.
Under these rules, there are three conditions which determine whether an individual is a “Salaried Member”. The ways in which the rules work mean that a member will want to fail at least one of the conditions to not fall within the Salaried Members Rules.
This condition is met (i.e. not failed) where it’s reasonable to expect that 80% of a member’s total remuneration paid by the LLP for their services to the Partnership would be classified as a “disguised salary”. An amount is recognised as a disguised salary if:
- It’s fixed; or
- It’s variable, but without reference to the overall profits/losses of the Partnership; or
- It is not affected by the overall profits/losses of the LLP.
For each individual who has control or influence over the management of the LLP, we would expect this condition to be ‘failed’. For small LLP’s it may be quite easy to determine who has ‘significant influence’, however for more complex structures this can sometimes be an issue.
However, since April 2016, UK LLP’s have been required to disclose a “Persons of Significant Control Register” (“PSC Register”), whereby they determine those members in the LLP that have the rights and duties to exert significant control over the business. To be a PSC, the individual must satisfy one out of five conditions, one of which is to exercise significant influence or control. Therefore, it would be beneficial, from the Salaried Members Rules perspective, to ensure the PSC register is up to date and contains those within the Partnership that do satisfy this condition.
To fail this test, a capital contribution of at least 25% of the expected disguised salary needs to be contributed by the member. In some instances, this amount can be a large up-front cost for the individual and therefore a two-month grace period has been granted to allow members to arrange suitable finance to cover their capital contribution, provided they have made an unconditional commitment to provide such capital.
Although these rules were introduced back in 2014, it’s essential to continuously assess the status of each member as although they may fail a condition one year, this may not be the case for subsequent years. Please get in contact with us should you require assistance in establishing whether the Salaried Member Rules apply to both existing and new LLP structures.
The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.