After one of the more heated consultations in recent years, HM Revenue & Customs has now published revised guidance on the intended operation of the new “salaried members” rules, which counteract what the Government regards as “disguised employment” through the use of LLPs. The revised guidance addresses some of the concerns raised, highlights HMRC’s highly prescriptive approach in respect of certain arrangements and still leaves some questions unanswered.
The salaried members provisions counteract what the Government regards as “disguised employment” through the use of LLPs. The mischief which these are seeking to counter is the use of LLPs to avoid National Insurance contributions (NICs). Members of UK LLPs are currently treated as self-employed by statute, unlike partners in general partnerships who may be treated as employees for tax purposes if, as a matter of general law, they are employees of the business rather than partners carrying on the business. As a result, a number of businesses have set themselves up as LLPs so that relatively junior people, who would otherwise have been employees, could become LLP members and therefore self-employed, thereby saving the business a substantial amount of employers’ NICs. However, inevitably the legislation appears to go further than its stated aim.
In light of the new proposed legislation (which will come into force with effect from 6 April 2014) many LLPs have been reviewing the terms of their agreements to assess whether any of their members will become “salaried members” and if so the best way to secure their self-employed status.
The most certain method of securing self-employed status is by members increasing their capital contributions to not less than 25% of their “disguised salary” but this must be done using their own resources or external loan finance (not loans from the LLP itself). It may also be possible to restructure the terms of their profit shares to ensure that there is sufficient link to the profits of the LLP as a whole, although this would have obvious impact on the LLP’s overall equity sharing arrangements and may be more challenging in larger or global structures. A firm which has an established management committee is unlikely to want (or be able) to change its procedures to allow all members to have the level of substantial influence required to satisfy the “significant influence” condition.
This revised guidance will help resolve some of the areas of uncertainty, particularly the period of grace which will now be allowed for payment of capital contributions and the comfort given that the targeted anti-avoidance rules will not be applied to genuine capital contributions. Also welcomed is the confirmation that the allocation of points to equity partners according to their performance will not cause re-characterisation provided the amount per point is determined by reference to the profits of the LLP as a whole. However, it is unfortunate that HMRC will not recognise capital contributions to other members in a structure (such as parent LLPs in other jurisdictions) even if the UK LLP receives funding from that body and have also stated that where profits of an LLP are determined on a cost plus basis this will always result in the members having “disguised salaries” under the rules (and therefore being salaried members unless able to show they have significant influence or have made sufficient capital contributions).
See our more detailed summary of the proposed legislation and new guidance here.
The revised guidance issued on 21 February 2014 can be found here.