New legislation will apply from 6 April 2014 to determine whether a member of an LLP should be regarded as employed or self-employed for UK tax purposes.
If a member of an LLP meets each of the three conditions below, they will be treated as employees for UK tax and national insurance contribution purposes:
- At least 80% disguised salary
The LLP member is to perform services for the LLP and it would be reasonable to expect that the amounts payable by the LLP in respect of the performance of those services will be wholly, or substantially wholly, fixed, or if variable, variable without reference to, or in practice unaffected by, the overall profits or losses of the LLP ('Disguised Salary'). The HMRC's guidance is that 'substantially wholly' is 80% or more of the amounts payable to the member is in the form of a Disguised Salary. To put it another way, this condition will be met if 20% or less of a member's total remuneration is in the form of a profit share based on the whole firm's performance.
- No significant influence
The member does not have significant influence over the affairs of the LLP. The HMRC's guidance is that having a vote for the managing committee, approving the firm's accounts or managing a section of the business does not amount to having significant influence over the LLP.
- Capital less than 25%
The LLP member's capital contribution to the LLP is less than 25% of the Disguised Salary expected to be payable for the whole tax year.
Further details can be found in our tax briefing.
LLPs will need to examine their remuneration structures to ensure that their members are taxed correctly.