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LLP ‘disguised employment’ rules go ahead

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24th Mar 2014
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In spite of a call from the House of Lords last week to delay the measure, the government is pressing ahead with legislation affecting the taxation of limited liability partnerships (LLPs).

The new measures address HMRC’s concerns, first expressed in the 2012 Budget, about “disguised employment”, where tax was being avoided by LLP members who were not in true partners, and should therefore should be taxed as employees.

HMRC documentation (paragraph 1.57 of the overview of legislation) confirmed that Finance Bill 2014 will set out tests to determine whether members of LLPs are partners for tax purposes, or whether they should be taxed through the payroll. Failing the test will bring an individual LLP employee within PAYE, and Class 1 NIC for earnings that would previously have been taxed as a profit share.

After consultation with the profession, HMRC clarified when the rules will apply and gave partners three additional months to prepare their finances - but the legislation is likely to post significan financial and administrative challenges for accountancy firms that converted to LLPs, and junior partners who currently have 80% or more of their remuneration guaranteed.

Rebecca Benneyworth, author of our Budget 2014 impact report for TaxCalc, said that despite the Lords’ late intervention, the amounts of money at stake were so high that “everybody in the tax world realised” the LLP tax measures would go forward as planned into the 2014 Finance Bill.

Starting from around £125m for 2014-15 and rising to £365m the following year, HMRC’s original estimate was that that the measure would reap around £300m annually when it settled down into a steady state in succeeding yers.

Another big fear among tax advisers, according to Benneyworth, lies in a general anti-avoidance provision in the new s863C(1) that stipulates: “No regard is to be had to any arrangements, the main purpose of which (or one of the main purposes of which) is to secure that the provisions do not apply to one or more individuals.”

Benneyworth commented:  “It is not clear how this aspect of the proposals will be used, but means that advice must be caveated heavily in case actions taken are not effective in altering the tax position.”

The disguised employment test

The test involves three conditions; to remain tax as self employed, the individual will need to ensure they can ensure that at least one of the conditions is not met:

performs services personally for the partnership, and is paid a fixed profit share. If paid a mixture of fixed and variable profit elements, the variable element must represent 20% of the total profit allocation to meet this condition.

does not have significant influence over the affairs of the partnership. This will depend on how decisions about the running of the firm are made, and the extent to which M has a say in decisions.

Their contribution to the LLP (ie capital at risk) is less than 25% of the total amount of disguised salary they are likely to be paid as a member of the LLP.

Mixed partnerships

For partnerships that include a member who is not an individual (normally a limited company), most profits routed through a partnership owned by a member of the partnership will be taxed on the partner concerned rather than the company through which the profits are routed.

Yet more conditions surround the mixed partnership provisions, which are described in more detail in Rebecca Benneyworth’s 2014 Budget report.

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By johnjenkins
25th Mar 2014 09:43

It is about

time that HMRC realised that it is not up to them who decides who is self-employed or employed. This whole farce - employment status - (and it will get worse) is based on HMRC and government greed for raising money however they can. Leave the workforce of this country alone and the HMRC will reap the benefits. Carry on down this road and you won't have a decent workforce left.

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