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LLPs and Salaried Partners

I have a client who is currently working via a managed service company, earning salary and dividend and claiming various expenses related to the jobs he undertakes. He works in a fairly specialised role for several client companies and his "jobs" can last anything from a couple of days to a couple of years, often running concurrently with each other. He is looking at his options in April when HMRC bring in the new MSC legislation. He has already decided that incorporating his own Ltd Co is an absolute last resort as he does not want the hassle or responsibility of being a director and having to oversee most of his own admin. His expected income based on last year will be borderline higher rate as well, just to complicate things!

He has been offered the option to join an LLP, where he will be paid via a combination of salary (they have said he will be a salaried partner and that his salary will be a minimum-wage level one) and profit-share on the balance of his gross weekly income, and has asked me for my opinion of the impact of such a scheme on his take-home pay. The advantage of this over continuing with his MSC is that he will still be able to claim the majority of his work-related expenses including mileage to his various projects.

I have told him I haven't a clue! But will do some research on his behalf and present him with some hopefully unbiased information. The first thing that appears to have come up is whether or not he can actually be a "salaried" partner and have profit share as well, it appears that he has to be one or the other.

The next thing is that assuming that this is the case and that as a salaried partner he will have to fund the partnership's employers NI on his wage out of his gross income, I feel that he would actually be marginally better off being taxed on his profit share anyway.

Your opinions and comments would be much appreciated, as I am groping in the dark here!


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By Anonymous
02nd Mar 2007 08:54

Based on JoSie's further information
what is proposed is membership of a large LLP in substitution for an MSC arrangement.

There is no possibilty that any part of the earnings will be SchE income with the LLP as the 'employer'.. I remain unconvinced that IR35 has been circumvented, for the reasons I have previously mooted.

There is a confusion between the way in which the profit share is computed ['salary' and generated income] and the way it is taxed.

The contractor[now transmogrified into member of an LLP]is prima facie liable for his/her share of the LLP's profits, and wholly dependent on the SA return filed by the LLP detailing his/her profit share. The 'contractor'[the member of the LLP] has no control over what that figure will be.

There is an unstated assumption that the LLP in question is established under the terms of the Limited Liability Partnership Act 2000. If what is proposed is an offshore LLP, then there is no certainty that HMRC will treat that as transparent rather than opaque.

The risks and costs are all for the contractor, and the final wording of the applicable legislation is only being published this month

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02nd Mar 2007 11:28

Form own company
MSC are going to be stamped on - what is so hard about forming a company, taking out PI and getting on with it.

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By Anonymous
27th Feb 2007 10:50

I'm trying to follow what you're saying here but I'm tying my brain up in knots.........

Let me elaborate on what the client has told me is being mooted to him and then maybe you can clarify what sort of partner he is for me?

He will be a member of an LLP, declared as such on the Co House return, with a contract agreement that will allow him to draw funds from the partnership equivalent to the amount of turnover he has generated personally less necessary expenses. He will not be a designated member. I assumed that this meant he would be wholly assessed under SA and would pay tax via his return and classes 2 & 4 NIC.

That seemed straightforward, until they then said he would be a "salaried partner" (their words) and would receive a designated salary taxed under PAYE based on NMW and get the balance as profit share. This seems a bit daft to me, as there would be no other way of funding the employers NI that would be payable other than out of his own contribution to turnover, thus actually reducing the amount of money he would take home. Surely not a cost-effective ay of doing things, and making them unneccesarily complicated to boot? So I wondered exactly what a "salaried partner" was, as my research seemed to indicate that a salaried partner would be an employee of the LLP - if that were the case he couldn't split his generated income, it would be an all or nothing scenario.

One of the reasons he is being sold this option seems to be that he has been assured that it would automatically fall outside of IR35 but it appears that that will not be the case either, that would surely still depend on the terms of each of his contracts? Think I'll start another question on that actually to avoid muddying the waters here further......

Thanks for your input so far anyway, it's all interesting.

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By ACDWebb
27th Feb 2007 11:08

Neil - I think we are basically saying the same thing then
All I was getting at was that, for example, I have seen Equity, Fixed Share and Salaried partners where:

Equity - is pretty obviously a member & self employed
Fixed Share - is a member and self employed receiving a fixed share that you might equate to salary & prior share as you say; and
Salaried - where they are not a member and are employed by the firm but have the title partner.

The poster, however seems to have someone where the LLP is trying to get an amalgamation of Fixed Share and Salaried (using the "definitions" above), which I suspect just will not work. Either the person is employed by the LLP or a member of the LLP and self employed. I cannot see HMRC easily accepting a bit of both.

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By neileg
28th Feb 2007 09:58

Yes, Alan
We do agree!

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By ACDWebb
26th Feb 2007 23:24

I would suggest that it need not necessarily be as clear cut as you suggest. It depends on the terms. Salary could be a definition of prior share, but it could just as easily mean a salary taxed under PAYE. Depends on the contract

As posted it could be

1) a fixed share (salaried) member of the LLP with a bonus based on profits and taxed as self employed - in which case no employers NI just class 2&4; or

2) not a member of the LLP, just paid a basic salary plus a profit related element of salary taxed under PAYE & with no obvious reason why client should be responsible for employers NI

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By Anonymous
26th Feb 2007 17:57

Just a quick comment before going on leave
If the client is being invited to become a member of an existing LLP, on terms which give him a profit share based on a formula, then that is Sch Dincome, ultimately subject to Sch D tax and Class 2 &4NI. The formula defning his profit share can be written any way that suits the parties.

There are no 'benefit' rules. He will be dependent on the LLP filing its SA tax return on time, and his having the relevant figures to include in his own SA return.

If the suggestion is that he is that the LLP is to be a substitute for his existing MSC, that does not of itself get him out of IR35, which applies to partnerships[ almost certainly including LLP's], as it does to companies-see ITEPA s49(3).

The Revenue are also gung -ho on using the 'associated company 'rules to attack individuals who are members of partnerships, by denying companies controlled by such individuals small company rate, for CT. Their justification is the wording of ICTA s417(3)(1)-although there are some arguments suggesting that this may not apply to members of LLP's

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By neileg
27th Feb 2007 09:36

I don't disagree with you, but I wasn't referring to 'salary', I was referring to a 'salaried partner'. That means I wasn't talking about a salaried member or a salaried employee. These are all different situations. Once you've determined which one you mean, the outcomes are clear cut.

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By Anonymous
26th Feb 2007 14:43

The terminology is inexact
You say he has been offered a chance to "join" a LLP.

Tax treatment for him will depend on whether he is a member of the LLP or not.

If he is member, his income will be wholly from his interest in the partnership, so trading profits and not salary.

If he is not a member of the LLP, all his income from it will be salary as an employee (profit share will be a salary bonus).

He can't be both a member of a LLP and an employee of it for tax purposes, as you have implied.

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By neileg
26th Feb 2007 15:32

Just to restate some of roger's explanation
A salaried partner, either in a standard partnership or a LLP, is not an employee. The salary is simply a prior allocation of profits and the aggregate of the salary and the profit share is the trading profit.

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