Are your LLP members employed or self-employed for tax purposes?

In April 2014, legislation was introduced to prevent the tax advantages of those with self-employment status being utilised where a member’s terms of service were largely associated with that of an employee. This is in part why the chosen structure for many professional practices is a Limited Liability Partnership (LLP). Although many LLP’s got their house in order in 2014, it is still important to ensure that the rules continue to be followed to avoid issues with HMRC.

For a member to be treated as a salaried member and therefore taxed as an employee, all three conditions of the legislation must be met. A reminder of those conditions are:

• At least 80% of the amounts payable to a member for services performed on behalf of the LLP is ‘disguised salary’.
  This condition would be met unless at least 20% of a member’s total ‘remuneration’ received is linked to the overall profitability of the LLP. This does not include performance related bonuses based on the performance of the member, branch or team.
• The member does not have significant influence over the affairs of the LLP. In other words is the member ‘in business’ or simply ‘working for the business’.
  For large LLP’s only members of the management board are likely to fail this condition whereas it should presumably be easier to demonstrate significant influence in a smaller LLP. It should be noted influence over a single branch or office does not constitute significant influence.
• The member’s capital is less than 25% of their disguised salary.
  If a member risks losing capital of at least 25% of their disguised salary should the LLP suffer financial difficulties the member will fail this condition and continue to be treated as self-employed for tax purposes. The definition of capital under this condition does not include undrawn profit shares or tax reserves.

Our EQ Professions team are on hand to assist you when reviewing your current arrangements, to ensure that you do not fall foul of the legislation, as this may have consequential implications of additional National Insurance liabilities and potential penalties and interest.

If you would like to discuss your own circumstances, require support or further information, please contact Mark Gibson at mark.gibson@eqaccountants.co.uk or call 01592 630055.