Limited Liability Partnerships - Beware!
If your business is run as a Limited Liability Partnership (LLP) you are probably aware of changes coming in on 6 April 2014. The new measures are designed to crack down on tax avoidance measures used by some LLPs.
What are the changes being brought in?
At present there is a presumption that all members of an LLP are selfemployed. As such they are treated differently, for tax purposes, to employees. It is tax advantageous to both the member and the LLP, for the individual to be treated as self-employed. From 6 April this presumption will be reversed and members will only be treated as selfemployed if they meet certain criteria.
What are the criteria?
The draft legislation sets out three conditions, of which at least one must be met for the member to be deemed self-employed:
- The amount of a member’s ‘disguised salary’ must not exceed 80% of their ‘reasonably expected’ profit share. In other words at least 20% of their profits must be properly variable and dependent on the profit of the LLP
- The member must have a significant influence over the management of the LLP
- The member must have sufficient capital (at least 25% of their deemed ‘disguised salary’) invested in the LLP which is at risk
What will the changes mean to my business?
If you run an LLP and all members (or partners) of the LLP are ‘genuine’ partners of the business, you will not be affected. In order for the members to be deemed ‘genuine’ they will need to meet the criteria set out above.
There are many businesses, however, which have used the self-employed presumption to their advantage by promoting employees to become junior members of the LLP. For those junior members who are on a high but relatively fixed remuneration package, have little or no involvement with the management of the LLP and little or no capital invested in the LLP, from the 6 April they will deemed to be employees.
Going forward the changes will allow LLPs to have both self-employed and employee members of an LLP but may also make LLPs a less attractive business model. It may be time to consider an alternative business model.
What should I do next?
If you run your business as an LLP and you think you may be affected you need to seek advice now. The structure of your LLP should be considered together with any LLP Agreement you have in place. The changes will affect you from 6 April regardless of your tax year end, which does not leave much time to enable you to make any necessary adjustments.