Posted on 18 June 2013
Following an announcement in the budget that the government would examine removing the presumption of self-employment for limited liability partnership (LLP) members, HMRC have published a consultation paper indicating that some members of LLP firms could face higher tax and national insurance deductions under proposals to tackle ‘disguised employment’.
HMRC's concern is that a lot of businesses structured as LLPs have "promoted" their employees to partnership status in order to take advantage of more favourable tax treatment.
While these people have been designated as partners or members, in substance they are still employees - they draw the same fixed salary and have the same perks, but don't contribute any capital or share in the risks of the business.
Under the current rules there is a presumption that individual LLP members are self-employed for tax purposes., thus resulting in more favourable treatment in respect to Income Tax and National Insurance than an individual who is an engaged on similar terms.
So, what's anging and what does this mean for me?
HMRC has proposed a two-fold test to determine whether each member is really a business owner or should be treated as an employee. The consequences of being treated as an employee are:Liability to account for income tax and Class 1 national insurance contributions;
• The LLP will have to pay secondary employer national insurance contributions and also bear the burden of deducting payroll taxes;
• But the LLP will be able to deduct the employed member’s “salary” as a business expense in the normal way.
While the proposed tests are intended to catch only situations where the rules are being abused, they may have wider implications for firms that have junior partners.
The consultation document also indicates that any artificial changes to partnership agreements to try and avoid these new rules will be clamped down on.
The consultation also proposes legislation to prevent partnerships from manipulating profit and loss allocations for tax advantage.
The consultation period ends on 9 August 2013 and the aim is to have the new rules in place for April 2014.
For further advice relating to this topic or any other tax issue, please contact one of our tax experts here.