New rules target salaried and fixed-share members of LLPs


HMRC has become increasingly concerned by some Limited Liability Partnerships (LLPs) who reward some of their members on terms which closely resemble a reward package of an employee.


This leads to a loss of tax as the LLP and salaried member do not need to account for employer and employee national insurance contributions on the reward package.


New Disguised Employment legislation comes into force from 6 April 2014 which seeks to tax the individual LLP member as an employee rather than a self employed partner. So called real partners will remain taxed on a self employed basis.


Who may be affected? 


Individual LLP members who are engaged on terms which closely resemble terms normally given to employees. These members are often referred to as salaried or fixed share partners.


How do the rules work?


The legislation will introduce three conditions which must all be met to deem the LLP member to be an employee for income tax and national insurance purposes. If one condition is breached then the rules do NOT apply.


Condition A: Looks at how the member is rewarded


There are arrangements in place whereby an individual performs services for the LLP in his capacity as a member of the LLP and it is reasonable to expect the amounts paid to the member are fixed, or if variable are not affected by the LLP’s profitability.


Condition B: Looks at the influence of the member over the business


The mutual rights and duties of the members of the LLP and of the LLP and its members do not give the individual significant influence over the affairs of the LLP.


Condition C: Looks at the level of investment of the member in the LLP


The individual’s capital contribution to the LLP is less than 25% of the member’s disguised salary.


There are detailed rules on the interpretation of the above conditions and professional advice should be sought if you are in any doubt.


What should I be doing now?


– Review how you reward your individual LLP members


– Review the management structure and decision making processes within your firm


– Consider fixed profit share or salaried members making capital contributions


We can help you look at the above points to establish if the new rules will affect any of your members and we will work with you to find a workable, tax efficient structure going forward.


Rachel Marsdin is a tax partner at Moore and Smalley. Please call Rachel on 01524 62801 for more information on the new Disguised Employee status.