New rules for taxing LLP members

Some members of limited liability partnerships (LLPs) are in danger of being taxed as if they were employed rather than self-employed under new rules that came into force on 6 April 2014.

From the tax year 2014/15 onwards, an LLP member will be taxed as an employee if they meet all the following conditions:

A. At least 80% of the total amount the LLP pays the member for their services is a ‘disguised salary’. This will be the case where the individual is paid a fixed level of remuneration or if the amount varies but it is not linked to the profits and losses of the LLP.

B. The member does not have significant influence over the management and affairs of the whole LLP.

C. The member’s contribution of capital to the LLP is less than 25% of the disguised salary for the tax year.

An LLP member who meets all these conditions will now be treated as an employee for tax under PAYE. Furthermore, both the member and the LLP as an employer will have to pay class 1 national insurance contributions (NICs) rather than the overall much lower level of self-employed NICs.

To prevent their being treated as employees, members of LLPs will need to establish that they do not meet at least one of these conditions, for example by making sure that at least 25% of their earnings remains within the LLP. Individuals who were LLP members at 6 April 2014 have three months (i.e. by 6 July 2014) to provide sufficient capital to ensure that condition C does not apply. In many cases, the additional capital should be available in the form of bank loans.

The new rules for LLPs were part of a wider set of provisions covering the taxation of partnerships. Another set of rules was aimed at preventing the allocation of profits in mixed partnerships to corporate partners in order to take advantage of the generally lower rates of tax that apply to companies.