LLP employment status options
The tax rules for limited liability partnerships (LLPs) were tightened from 6 April 2014, and since then it has been much more difficult for fixed salary members to retain their self-employed status.
Making a cash call has proved to be by far the most popular route to retaining such status. The basic idea is that a member can avoid being taxed as an employee if they have made a sufficient “capital contribution” to the partnership, so that there is a real risk resting on the success or failure of the LLP. The amount required is the equivalent of at least 25% of the member’s expected “disguised salary” for a particular tax year.
Capital contribution – This is what members have contributed in accordance with the LLP agreement, and it must be of a permanent nature. The contribution cannot include a current account balance, any amounts that are not payable until a future date, undrawn profits (unless converted into capital), amounts held in a tax reserve, or any other amounts where there is no intention that the investment will be of a permanent nature. However, a long-term loan held on terms comparable to capital will count, because the only real difference is in the description used.
Disguised salary – This is the element of the member’s pay that is not profit-related. It includes fixed sums such as salary, and variable sums which are not based on the profits of the LLP as a whole – such as payments based on personal or team success. Drawings paid on account of a genuine share of overall profits are not included provided the drawings are subject to clawback if the expected profits do not materialise.
For existing LLP members, the 25% test must be considered at the start of each tax year and also if there is any change in circumstances.
New members have a two-month grace period in which to meet the 25% test; this is so that they have enough time in which to arrange any necessary loan finance. Their disguised salary is scaled up to the whole year for the purposes of the calculation.
But be warned - even if an LLP has sorted everything out for the current year, funding arrangements will still need reviewing in advance of 5 April 2015 if payments to members are set to increase.
We can offer advice on this potentially tricky area should you need it.
In this edition
Pensions: how flexible is flexibility?
This newsletter is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication. The newsletter represents our understanding of law and HM Revenue & Customs practice as at 10 October 2014