UK and International Tax news

Changes To Tax Treatment Of LLPs

Thursday 27th February 2014

On 10 December 2013 HMRC issued a consultation document on two aspects of the taxation of limited liability partnerships [LLPs], being disguised employment and profit and loss allocation schemes. HMRC has now published ‘Partnerships: A review of two aspects of the tax rules : Salaried Members Rules’ together with a revised technical note and guidance dealing with the new salaried partner rules previously announced. 

Revised legislation has not yet been published but the Government is proceeding with  plans to make salaried partners employees for tax purposes from 6 April 2014.

LLPs incorporated in the UK are corporate bodies with greater resemblance to limited companies than to traditional partnerships. However, specific tax legislation exists to ensure that they are treated as partnerships for tax purposes, rather than as companies. In particular, s.863 ITTOIA 2005 provides that any individual LLP member is treated as self employed for tax purposes and is subject to income tax and Class 4 NICs on the partnership profit share. The rule was intended to treat LLP members in the same way as partners in traditional partnerships.

In deeming all individual LLP members to be self employed, the existing tax rules go further than simply aligning their status with that of individuals in a traditional partnership. An individual has to have the characteristics of a partner to be determined as such in a traditional partnership. In an LLP, an individual needs only be registered as a member. HMRC considers it has become evident that many LLPs have members who are engaged on terms similar to those of employees rather than traditional partners.

Following consultation, HMRC has confirmed that legislation is being introduced in FB 2014 to address this inconsistency and to ensure that LLP members who are, in effect, providing services on terms similar to employment are treated as employees for tax purposes.

The new Salaried Members rules will apply only to LLPs formed under the LLP Act 2000. They will not apply to general partnerships or limited partnerships that are formed under Partnership Act 1890 and Limited Partnership Act 1907 respectively, and will not apply to entities outside the UK that have structures broadly equivalent to a UK LLP.

The new rules will treat an individual member of an LLP as an “employee” if three conditions are met, being disguised salary, which will be a key indicator of whether an LLP member is a salaried member, significant influence, and capital cvontribution.   If all three conditions are met, the individual will be treated as a Salaried Member and as an employee for tax purposes, subject to PAYE and to tax on any benefits in kind.

If you would like further information on the above, please contact Keith Rushen on 0207 486 2378.

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