New salaried member tax rules create significant uncertainty for LLPs

13 December 2013 | Alasdair Friend

The government has published draft legislation which has the potential to create significant additional costs for many Limited Liability Partnership (LLPs). Although the proposals on ‘salaried members’ have been described as anti-avoidance measures, they have the potential to apply to a wide variety of businesses currently structured as LLPs, including accountancy firms and solicitors.

The new salaried member rules

The proposals have changed quite significantly from those published earlier in the year.  Under the new proposals, a member of an LLP will be deemed an employee for tax purposes if all of the following three conditions are satisfied:

1) The amounts payable to the member substantially wholly consist of ‘disguised salary’ – this is any amount which is:

  1. fixed, or
  2. if variable, is without reference to the profits or losses of the LLP, or
  3. in practice is not affected by the overall amount of profits or losses of the LLP

HMRC have proposed that this condition will be satisfied where at least 80% of the total amount payable to the member is disguised salary.

2) The second condition is that the member does not have a significant influence over the affairs of the LLP

3) The third condition is that the member’s capital contribution is less than the 25% of the ‘disguised salary’

If all of these three conditions are satisfied, partners will be treated as employees for tax purposes and therefore income tax and employee National Insurance contributions will need to be accounted for under PAYE. Most significantly, employer National Insurance contributions will be payable by the LLP (currently at a rate of 13.8%).

Comment

There are many LLPs in which members are not required to contribute significant amounts of capital and are not involved in the management of the LLP.  Therefore, in those cases, the application of the new rules will depend on which amounts payable to a member could be considered ‘disguised salary’. The extremely wide definition could cover a number of LLP remuneration arrangements that would not ordinarily be considered to involve salaried members.  The accompanying HMRC guidance places emphasis on what is realistically expected to be paid to a member – if the amount is not expected to vary significantly according to the profitability of the firm, then it could be considered disguised salary.  Therefore, arrangements where a member’s remuneration is primarily based on personal performance could potentially be caught.

Due to the broad potential application of the new rules, we expect that there will be significant pushback from industry bodies in affected business areas.  However, given that the new rules will take effect from 6 April 2014, there is very little time for affected LLPs to take any necessary action.

For further information or to discuss the issues raised, please get in touch.

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Disclaimer

Content is for general information purposes only. The information provided is not intended to be comprehensive and it does not constitute or contain legal or other advice. If you require assistance in relation to any issue please seek specific advice relevant to your particular circumstances. In particular, no responsibility shall be accepted by the authors or by Abbiss Cadres LLP for any losses occasioned by reliance on any content appearing on or accessible from this article. For further legal information click here.

The author

Alasdair Friend
Partner
Compensation and Benefits
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