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Salaried Members of LLP: Employees from April 2014

23rd October 2013

Following consultation, HMRC has confirmed that the presumption of self employment for salaried members of Limited Liability Partnerships (LLPs) will be disapplied from 6 April 2014. Salaried or fixed share partners will therefore be taxed as employees through PAYE and employers’ National Insurance Contributions (NIC) will be due, unless they can demonstrate that they would qualify as self employed by applying the usual tests of employment status.

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Where those tests indicate self employment, it will then be necessary to consider the LLP member’s exposure to risk and reward. HMRC has previously indicated that that it will treat a member an employee if s/he:

  1. has no economic risk (of loss of capital or repayment of drawings) in the event that the LLP makes a loss or is wound-up;
  2. is not entitled to a share of profits beyond a “fixed share”; and
  3. is not entitled to a share of surplus assets on a winding-up.

For the purposes of the Second Test any risk or entitlement which is not judged to be economically significant is to be ignored. As an illustration, it is suggested that an entitlement to profits of less than 5% of the member’s fixed share is likely to be regarded as insignificant. 

This measure will potentially affect all LLPs with salaried partners, including solicitors, architects and accountants, and in many cases will represent a material extra cost. We await further details of the practical application of this significant change, but contact our tax team if this change is likely to affect you or your business.

If you would like to discuss this topic further please speak contact Neil Simpson, tax partner.

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