When limited liability partnership (LLP) status first became available to UK businesses in 2000, it gained immediate popularity amongst financial advisers, consultants, accountants, lawyers and other owner-managed professional services firms. The new classification emphasised the recognition of partners as self-employed, offering a way for businesses to have both limited liability status and a flexible working structure.
Fourteen years later, HMRC raised concerns that some LLPs may have had members providing services akin to employees. Classed as ‘disguised employees’, HMRC was losing both employers and employees’ Class1 National Insurance (‘NI’) on these particular members. To remedy this, the Government introduced a new set of conditions – Salaried Members Rules (SMRs).
This year, LLPs have come under the spotlight more recently following the First Tier Tribunal (FTT) judgement in BlueCrest Capital Management (UK) LLP v HMRC. This high value case, with £55m additional NI liabilities at stake, is increasing awareness of the concern that some businesses could be misusing their LLP status. While FTT decisions are not binding and this judgement
has been followed by an appeal to the Upper Tier Tribunal, this case should be a prompt for other businesses to review their records to ensure they are not violating any requirements of their LLP status.
In the past, HMRC has undertaken its enforcement activity amongst LLPs, beginning with nudge letters, notices of enquiry, as well as checks of partnership tax returns. The high stakes of BlueCrest vs HMRC make it a significant ruling for all LLPs, particularly those who operate on the assumption that their members will fail conditions that would class them as employees.
As we wait for a date to be set for the UTT decision on BlueCrest, what can LLPs do in the meantime? HMRC’s checks focus on identifying ‘disguised employees’, to ensure that only ‘valid’ LLP members benefit from the tax treatment correspondent with a partnership. These disguised employees are identified by applying a set of rules offering guidance on how members should be taxed. SMRs outline the following conditions for LLP members to be treated as an employee for tax purposes, all of which must be fulfilled.
The first condition is whether it is reasonable to expect that at least 80 per cent of the total amount payable by the LLP for the individual’s services in individual’s capacity as a member of the LLP will be ‘Disguised Salary’. This includes payments which are either fixed, variable but without reference to the overall profit or loss or is not in practice affected by the overall amount of profits or losses of the LLP.
The second condition is that the mutual rights and duties of the individual should not have significant influence over the affairs of the LLP.
The third condition is that the individual’s capital contribution is less than 25 per cent of the amount of the disguised salary it is reasonable to expect the member to receive.
Checking thoroughly that all members meet the stated conditions should guarantee compliance at that point in time, however, as members and circumstances change, LLPs may find their compliance status changing too. Just because members were previously compliant, doesn’t mean they will always be.
Reviewing regularly is therefore advisable. Some firms may choose to assess their qualifying status each year, others upon the recruitment
of new members or promotion of existing ones, or along with any other significant milestone causing internal changes. These regular checks should ensure that firms remain compliant on an ongoing basis.
If an LLP receives communication from HMRC, they should make sure to consider their past, present and future positions. If regular compliance reviews have been upheld, it should be easy to assess records of bonuses and performance shares, and to identify that each varies with the overall profit and loss of the firm. If this cannot be proved, HMRC may contend that a member’s earnings are actually ‘Disguised Salary’.
LLP status is attractive for many, with favourable tax conditions and flexibility over the running of the firm. To safeguard the long-term outlook of an LLP though, firms must be responsible, regularly checking their records
to ensure they remain compliant with the prevailing legislation. BlueCrest is a sharp reminder that HMRC is on the case, so LLPs must stay diligent too.