The Finance Bill has introduced new provisions for members of LLPs from April 2014 which could see certain salaried partners being reclassified as employees for tax purposes. Unless certain conditions are met, salaried partners will be taxed as employees, suffering PAYE and class 1 national insurance costs, as well as being taxed on benefits in kind.
As a reminder, a member has to be able to demonstrate that at least one of the following conditions will be met in order to avoid being treated as an employee for tax purposes:
Condition A – It is reasonable to expect that more than 20% of the member’s profit share for services as a member is variable based on the firm’s overall results; or
Condition B -The member has significant influence over the LLP’s affairs; or
Condition C – The member has a capital contribution of at least 25% of any ‘disguised salary’ in respect of the services that the member performs for the LLP.
Many LLPs have taken the view that meeting condition C is the easier condition to satisfy, requiring a member to make capital injections into the LLP to bring their contribution up to 25% or more of any disguised salary amount. The condition will be treated as being met for 2014/15 is the member gave an undertaking prior to 6 April 2014 that the capital would be introduced and is actually introduced by 5 July 2014.
As the 5 July deadline is fast approaching, the LLP must make sure that members introduce capital in line with their commitments. If it is not introduced on time, the member will be treated as an employee from 6 April 2014, which brings with it RTI implications and the member having to follow the cessation rules for self-assessment purposes.
There are similar rules for those who join an LLP after 5 April 2014. They also need to make a firm commitment on the day they become a member of the LLP and any capital contribution must be made within two months of their admission.
The salaried partner rules are complex and penalties for getting this wrong have the capacity for being significant. If you would like help to see if your business will be affected, please do contact us.