Limited Liability Partnership (LLP) changes
A reminder that LLP members, who HMRC considers are not risk taking partners, may find themselves re-classified as ‘Salaried Members’ and taxed under the PAYE regulations as if they were employees.
Salaried members will also be subject to the benefit-in-kind regulations. The new legislation will include a three part test to see if LLP members should be taxed as salaried members. The relevant provisions apply from 6 April 2014.
If all three parts apply then the member will be considered a salaried member. As usual the definitions are full of ambiguities, but in a simplified format they are:
- Condition A: a member’s regular payments from the LLP have the characteristics of a ‘disguised salary’ i.e. they are fixed and do not vary in line with actual profits and losses of the partnership.
- Condition B: a member has no significant influence over the affairs of the LLP.
- Condition C: a member’s capital stake in the business is less than 25% of their expected reward package.
Although HMRC have published a number of examples in order to clarify how these rules will be applied in practice, there will likely be ‘grey areas’ where interpretation will be somewhat difficult and uncertain. For example there is no formal definition of the phrase ‘significant influence’ in Condition B.
Essentially, as long as LLP members can demonstrate that at least one of the three conditions does not apply to their circumstances, they will continue to enjoy a self-employed status.