New salaried member tax rules create significant uncertainty for LLPs
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:
- fixed, or
- if variable, is without reference to the profits or losses of the LLP, or
- 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%).
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.
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