New rules come into effect for LLPs
Since 6 April 2014, 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. Both the affected LLPs and their members will have to pay National Insurance as if the affected members were employed by the LLPs.
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. If all three parts apply then the member will be considered a salaried member.
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. at least 80% of the member’s pay is fixed or if variable do not vary in line with actual profits and losses of the LLP.
- 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 has 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. However, it is likely that in most firms only senior partners will be regarded as having significant influence over the affairs of the LLP.
As long as an LLP member is able to demonstrate that at least one of the three conditions does not apply to their circumstances, they will continue to enjoy a self-employed status.