Salaried Members of LLPs

Do you operate your business as an LLP? If you do, you need to be aware of the change in tax treatment of certain LLP members from 6 April 2014. Members who meet all of these conditions will be taxed as employees:

A. works for the LLP as an LLP member and at least 80% of the amounts paid to him for that work are disguised salary;
B. does not have significant influence over the affairs of the whole of the LLP; and
C. is not required to contribute funds to the LLP (a capital contribution), or if he does contribute funds that contribution is less than 25% of his disguised salary for the current tax year.

From the member's perspective the easiest of the conditions to break is C - provide capital to the LLP (aka: partner's loan). Current members of the LLP will have until 6 July 2014 to contribute the required level of capital, but they must make a firm commitment to do this by 6 April 2014. Members who join the LLP on or after 6 April 2014 will have two months in which to raise the required level of capital to break condition C.

If you are caught by these new rules and become a deemed employee of the LLP on 6 April 2014, you will cease being self-employed on 5 April 2014. Depending on the accounts year-end of the LLP, you could be taxed on up to 23 months of profit in 2013/14, subject to any overlap relief. The on-account tax payment you made on 31 January 2014 will almost certainly be incorrect. Talk to us about recalculating your tax payments for 2013/14 and 2014/15.

The LLP business that has members caught by these new rules will have to set up PAYE scheme if it doesn't already have one. We can help you with that.

Disguised Employment

The Government is cracking down on situations in which workers are treated as self-employed for tax purposes, and hence pay low amounts of NICs, but from the outside they appear to act as employees. The following changes in the tax law are proposed to block the use of 'self-employed' workers working through LLPs or who are hired-out through employment agencies.

LLPs

All individual members of LLPs are currently taxed as self-employed persons, even if they receive a regular 'salary'. This is the default position of the law and nothing is being 'fiddled' to put workers in this position. However, HMRC believe this rule is being abused, and the workers involved may not realise that they are technically self-employed.

From 6 April 2014 salaried members of LLPs will be treated as employees of the LLP if all of the following conditions are met:

- the member works for LLP and at least 80% of the pay he receives from the LLP is 'disguised salary';
- where the member has contributed any capital to the LLP, that capital amounts to less than 25% of the member's 'disguised salary' for the year; and
- the member is not involved significantly in the management of the LLP.

The Government has not yet defined term 'disguised salary'. If you have salaried members in your LLP we need to talk about these tax changes.

Employment Agencies

From 6 April 2014 if a worker supplied by an offshore employment agency personally carries out the work, or is involved in the provision of the services, the payment from the engager to the worker will have to be taxed under PAYE with class 1 NICs deducted. Any apparent right of substitution in the worker's contract will not prevent PAYE and NICs being due at the employed rates. The agency at the end of the chain must be an off-shore agency for the new rules to apply, but there may be UK based agencies in between and it may not be obvious to the worker or the engager of that worker, that an off-shore agency is in the chain

If you have any doubts about the contracts you are using either as a worker or an employer, our tax experts can help check the tax implications for you.