Limited Liability Partnerships came under closer scrutiny in the Budget 2013.  The aim is to target LLPs which use the structure to hide the employment relationship of the partners and those with Corporate partners who divert business profits to the corporate partners in order to avoid tax.

Although the following measures come in to play from 6^th April this year, the anti-avoidance measures make it effective from 5^th December 2013.  This is to prevent partnerships changing their arrangements in order to avoid the new rules.

The two main areas of focus are salaried or fixed profit share partners which is referred to as disguised employment, and profit and loss sharing arrangements within mixed partnerships.

LLP partners with fixed profit share

HMRC believe that many members of an LLP should be taxed as employees, because they don’t see them is true partners.

A new test has been brought in which has three conditions.  Where the member tested meets all three conditions then he or she must be treated as an employed salaried member and be brought within the PAYE system with tax and class I NIC applied to any earnings,  which had previously been Taxed as profit share.

This also means that if a vehicle is provided for the members use by the partnership this will be taxed as a benefit in kind.  As such the member will have to pay tax and NIC and the LLP will have to pay Class 1a NIC on the benefit.

HMRC does actually accept that employment tax rules are imposed on the individual but that in fact the individual has no employment rights. This is because he is not actually an employee for employment law purposes.

The test is as follows. The provision is triggered when all conditions A to C are met:

Condition A: The Member is performing services for the LLP in his capacity as a member of the partnership and it’s reasonable to expect as a result of these arrangements that any amounts paid to him in respect of his services will be wholly or substantially wholly a disguised salary. In other words if his reward package is comparable to that received by an employee, either a fixed salary or a variable bonus based on performance rather than profit share.

Condition B: The Member doesn’t have significant influence over the affairs of the partnership.

Condition C: The Member’s capital contribution to the LLP is less than 25% of the total amount of his disguised salary which would be expected to be paid in the relevant tax year by the LLP in respect of the members performance of services as a member. Normally the relevant time would be the beginning of the new tax year.

These tests must be reviewed each tax year.

Corporate LLP Members

This applies to partnerships who have members which are not subject to UK income tax for example this might be a limited company. The problem here is that HMRC believes these structures are used to avoid tax on a very large scale.   Where for example an individual member introduces his Ltd company as a corporate member, and which then receives a profit share that would otherwise have been paid to the individual member.   If the Member then has the power to enjoy the fund which had been paid to his company then:

• The individual member will be treated as a salaried member.
• The amount paid to the company will be treated as employment income paid to the individual member.

There are anti-avoidance rules are in place to catch anyone trying to put measures in place to counteract these new rules.

fiona@grant-jonesaccountancy.com

http://www.grant-jonesaccountancy.com