New tax rules for LLPs

However, the Government announced in the Autumn Statement 2013 that it aims to target individual members, deemed self-employed, who would normally be regarded as employed.

The LLP is a unique entity as it combines limited liability for its members with the tax treatment of a traditional partnership. Individual members are deemed to be self-employed and are taxed as such on their respective profit shares.

The Government now considers that self-employed status is not appropriate in some cases. For example, individuals who would normally be regarded as employees in high-salaried professional areas such as the legal and financial services sectors are benefitting from self-employed status for tax purposes which leads to a loss of employment taxes payable.

The new rules will apply at any time when an individual (M) is a member of an LLP and three conditions are met. The conditions are:

1. They don’t get a profit share

There are arrangements in place under which M is to perform services for the LLP, in M’s capacity as a member, and it would be reasonable to expect that the amounts payable by the LLP in respect of M’s performance of those services will be wholly, or substantially wholly, disguised salary. An amount is disguised salary if it is fixed or, if is variable, it is varied without reference to the overall profits of the LLP.

2. They aren’t really involved in running the business

The mutual rights and duties of the members and the LLP and its members do not give M significant influence over the affairs of the LLP.

3. They haven’t made a large enough capital contribution to the LLP

M’s contribution to the LLP is less than 25% of the disguised salary. M’s contribution is defined (broadly) as the amount of capital which the individual has contributed to the LLP.

The new regime will have effect from 6 April 2014.

All LLPs need to check their profit arrangements and Members’ Agreements to see whether they are caught or not and, if they are, what can be done to fix the situation.