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Can't LLPs have ordinary employees

Can't LLPs have ordinary employees

A friend has been offered a job. The employer is an LLP.

He has been offered a package based on him being a Member entitled to a fixed profit share of the profits.

It seems this has been set up to save tax. He will be saving 3% NIC. And will "technically be self employed so can deduct expenses" - the employers words.

Is this the new wheeze? There's nothing wrong with a genuine partnership arrangement whereby a junior partner is a paid a fixed income. But my friend isn't self employed. Is this just a new way of getting around the employment status issue. Are all workers of an LLP now members??? Don't they have ordinary employees?

Thank you.


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By ACDWebb
06th Sep 2012 11:20

Yes they can have employees & No they are not all members

If he is a member then yes he will be deemed self employed for tax as a member of the partnership.

That would obviously have consequences re payment of tax & NIC and would mean that the expenses rules are marginally more favourable as Wholly & Exclusively rather than Wholly  Exclusively & Necessarily, however, those expenses cannot be claimed in his personal return, but have to be through the LLP accounts & return.

He will need to take his own professional advice regarding the LLP agreement, and be fully aware of any additional liabilities he might be letting himself in for as a member of the LLP rather than an employee


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06th Sep 2012 11:29

Yes on all counts

An LLP can have "ordinary" employees.

It's become a common practice in some quarters though to make people who would otherwise be employees members of the LLP.  As members of an LLP, the law says that they are taxed as if they are partners in a partnership.

It will save your friend 3% NI as you say.  The bigger saving though is with the "employer".

Your friend will probably have trouble enforcing any employment rights and the LLP agreement will be weighted in the "employer's" favour, I expect.

It's obviously not correct that he can deduct expenses.  Unless they're deducted in computing the LLP's profits for tax purposes, he can't obtain a further deduction.

What does the potential "employer" do? I've only seen this structure used by fund managers and similar, although I can't see that there's any way of HMRC attacking it if it's adopted more widely.

EDIT: Apologies for the duplication.  ACDW's response wasn't there when I started typing.

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to barnsleyfan
06th Sep 2012 11:39

Thank you to both replies.  I

Thank you to both replies.  I had forgotten that expenses must go through the LLP and not as on his TR so that is a little fib of the employer.

I have suggested that the Ers NIC foregone be paid as higher basic profit share but was they came back that that meant more profit so more profit share in the future? I don't see that.

It's something to do with rail, railtrack, I don;t know.

But I also know of a former colleague that is now "employed" by a firm of accountants and paid as a member, as above. The employer withelds tax from her each month and saves towards her Jan and Jul bills.

So how come HMRC can't / don't challenge this for employment status in general?

Is there any risk to the employee, sorry member! If I gave my employee 20% in my own company and promised her 30K as a dividend there would be value in those shares and tax issues? But this valuation problem doesn't occur with an LLP? 



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By ACDWebb
06th Sep 2012 12:07

A member is deemed s/e

The former colleague has joined as a member of the LLP and will have responsibilities under the LLP agreement. Employment Status doesn't come into it

The sums withheld each month are merely retentions from drawings against ultimate profit share. This will unwind at year end when the LLP accounts and partner current accounts are prepared.

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06th Sep 2012 12:54

I would add

we have a situation with a client whose employer has restructed to be an LLP . We have consulted a specialist employment lawyer who has basically advised that he must not become a member without suitable monetary compensation for the loss of his employment rights.He has also been advised that any move to dismiss him (directly or indirectly) would give rise to a claim under Employment Law.

At the end of the day it is a move by the employer to save on employers NI

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to noab
06th Sep 2012 13:51

Different issue - just for info

The situation you describe isn't comparable with that referred in the OP. That concerns a new job and not a variation in terms or cancelation of an existing one. There won't be an employment contract yet and so the Transfer of Undertakings (Protection of Employment) Act won't and can't come into play. 

From the description given by the OP you're probably right that it is a just a tax and NI saving scheme. But it isn't one that can be challenged by HMRC as long as the partnership agreement is genuine.

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06th Sep 2012 21:02

Just to add my two pence worth...

...sometimes partners can get some employment rights:



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07th Sep 2012 00:26


Thanks Steve, this is the sort of tricky stuff that makes giving professional advice interesting and often difficult. If I read the article correctly it's saying that most partners have rights in connection with their work that are in common with employees, e.g. anti-discrimination etc  

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to elliottchandler
07th Sep 2012 09:44

That's my understanding...

That's my understanding (and that of my "friendly" lawyer). Testing this of course will no doubt be very expensive.

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14th Sep 2012 11:37

Practising Certificate

Don't forget that if your 'friend' is a member of a professional body, they are likely to need a Practising Certificate to be a partner in an LLP.

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By Eric T
14th Sep 2012 12:05

Would there not be IR35 issues regarding a "disguised employment"?


In what way is this individual a genuine, bona fide "partner" in the enterprise?


What partnership and/or equity risks is the "partner" exposed to?


How does he/she feature in the formal doumentation of the partnership at Companies House.


Does this partner need to cover himself/herself for the business risks that partners normally have to be covered for - or is there a massive assumption in this type of setup that the partners do not need to bother with such precautions as the entity is an LLP rather than an old fashioned unlimited partnership?

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to Dibden70
15th Sep 2012 11:51

My thoughts exactly.

My former colleague sits in the tax dept bashing out TRs when told to. Hardly taking a risk is it?

And Louise, "tut tut", by my "friend" were you inferring I was asking about myself.

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15th Sep 2012 11:59

IR35 can't apply...

... because there's no intermediary.  The "employee" is a member of the "employer".

There's no need for the "employee" to be a bona fide partner sharing in the partnership/equity risks.  They will as a matter of law and fact be a member of a body corporate.

Tax law then says that the members of such a body corporate are taxed "as if they are members of a partnership".

Apart from the employment rights aspects, the only other issue is that there will be an issue if the LLP makes a loss.  So it's only really a useful structure where the possibility of making a loss is remote.

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By Eric T
15th Sep 2012 13:29

What about risk?

Does this "partner" carry any of the risks that the partnership in general carries?


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15th Sep 2012 13:50

What about risk?

It's irrelevant.

He's a member of an LLP as a matter of fact.  There's no employment relationship as a matter of fact. His personal services aren't being provided by an intermediary as a matter of fact.

The PSC legislation (IR35) can't apply, because there is no intermediary.  Neither can the MSC or agency legislation.

There's no need to examine it to determine the true relationship.  Who cares about risk?  He will be taxed as a member of an LLP.

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By Eric T
16th Sep 2012 12:46

Don't HMRC often look beyond the mere stated relationship to assess the true nature of the relationship? They have done this on plenty of occasions in many tax cases.

Why would they not examine the true circumstances of a relationship in a situation such as this?

Are partnerships a special case?


And I always thought that the definition of a partnership included the notion that the partner was sharing in the risk of the enterprise - unlike an employee. I didn't think that LLPs operated on a different basis.

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16th Sep 2012 14:32

Steve is right and

....even if there were a question over the individuals employment status with the LLP (and as far as I can tell there isn't - see below) IR35 doesn't come into play because the worker is working directly for the LLP; IR 35 can only apply where the work interposes an intermediary entity, namely a company or partnership of his or her own through which they provide services.

In this particular case It would be up to HMRC to test whether employment/tax law dictated that the worker was an employee. Essentially test is the same as for IR35, but the outcome that if an employment relationship was found it would be the LLPthat would face the consequences of failing to operate PAYE etc not the intermediary business as is the case with IR35

However, as long as the partnership arrangement is genuine HMRC have nothing to attack because the worker is a partner as a matter of law. End of story. Have a look at this link (I've always liked this one!):

it addresses the question of whether a partnership is a sham or not where a spouse or family member is involved, but the principle holds true for any other individual. 


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17th Sep 2012 08:16

Genuine partnership

Tony Court is basically right, but it does not follow from the fact that there is an LLP that there is a genuine partnership.  S. 4(4) of the Limited Liability Partnerships Act 2000 reads: 'A member of a limited liability partnership shall not be regarded for any purpose as employed by the limited liability partnership unless, if he and the other members were partners in a partnership, he would be regarded for that purpose as employed by the partnership.'  Note the caveat.

The same would be generally true of a salaried partner, who only draws a fixed monthly amount and contributes nothing towards the capital of the firm.  If a member of an LLP contributes no capital and is paid a fixed monthly amount he should be taxed as an employee.

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17th Sep 2012 14:17

Yes but

S.4 LLPA 2000 doesn't say that a person is an employee in such circumstances, it just says that they can't be treated as an employee for any purpose unless those circumstances apply.

The "employee" is a member of the LLP, as a matter of fact.

And S.863(1)(a) ITTOIA 2005 says "for income tax purposes...all the activitities of the LLP are treated as carried on in partnership by its members..."

It doesn't need to be a genuine partnership, tax law deems it to be a partnership carried on by those persons that are members of the LLP.  Tax law simply doesn't support your assertion that he should be taxed as an employee, it says the direct opposite.

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17th Sep 2012 13:35

Just so

Steve Kesby's quite right - thanks for the correction.

However it might be different if a member of an LLP also had a contract of employment, under the judgment in the PA Holdings case.  HMRC might also try invoking that in a blatant case of disguised employment.

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