Last May I commented on the Queen’s Speech and the removal of the presumption of self-employed status in LLPs. I pointed out at the time that almost invariably fixed share partners in LLPs were, in reality, employees in all but name so that there was little point in LLPs continuing to pretend otherwise.
Notwithstanding (occasionally convoluted) protests from leading accountancy firms, particularly those that championed such arrangements, details of the crackdown have now emerged in the form of draft legislation published by HMRC. According to detailed guidance notes the changes are likely to affect “Individual members of a limited liability partnership (LLP) who work for the LLP on terms that are tantamount to employment (‘salaried members’) and LLPs that have salaried members”. The objective is to make the tax system fairer by ensuring that employment taxes are paid by LLP members who are essentially employees and, significantly, the LLP employer – consequently liable for 13.8% Employers’ NIC contributions.
There is a three-fold test.
the disguised salary condition
Disguised salary means remuneration which is either fixed (as in many cases) or not affected to any material extent by the profits and losses of the business. What is a material extent? This condition will be satisfied unless at least 20% of the overall remuneration is directly related to the profits and losses of the business as a whole. Consequently individual or team performance incentives will not satisfy this condition.
the influence condition
In order to avoid the presumption of employed status the member must be able to exert “significant influence over the affairs of the partnership”. What this means in practice is likely to lead to a good deal of litigation but one would expect that this will catch many fixed share members, particularly in larger organisations.
the capital contribution condition
Under many current arrangements fixed share partners are liable to make only nominal capital contributions and these are sometimes covered by adjustments to drawings so that it is not necessary to make any capital payment at all from outside resources. In order to make the idea of capital contribution meaningful the third condition requires that in order to avoid the presumption of employment status, a member must contribute an amount equivalent to at least 25% of their remuneration. Consequently remuneration of £100,000 would require a capital contribution of £25,000. Furthermore this is an annual requirement so any increase in pay will require a corresponding 25% increase in capital contributions.