Since their introduction in 2000, LLPs have become increasingly popular as a vehicle for carrying on a wide variety of businesses. The LLP is a unique entity as it combines limited liability for its members with the tax treatment of a traditional partnership. Individual members are deemed to be self-employed and are taxed as such on their respective profit shares.
The government now considers that deemed self-employed status is not appropriate in some cases. For example, individuals who would normally be regarded as employees in high-salaried professional areas such as the legal and financial services sectors are benefitting from self-employed status for tax purposes which leads to a loss of employment taxes payable.
The new rules will apply when an individual is a member of an LLP and three conditions are met. The conditions are:
- There are arrangements in place under which the individual is to perform services for the LLP, in their capacity as a member, and it would be reasonable to expect that the amounts payable by the LLP in respect of their performance of those services will be wholly, or substantially wholly, disguised salary. An amount is disguised salary if it is fixed or, if is variable, it is varied without reference to the overall profits of the LLP.
- The mutual rights and duties of the members and the LLP and its members do not give the individual significant influence over the affairs of the LLP.
- The individual’s contribution to the LLP is less than 25% of the disguised salary. The individual’s contribution is defined (broadly) as the amount of capital which they contributed to the LLP.
The new rules will have effect from 6 April 2014.