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LLP won't pay VAT to members

Do the designated members have any right to refuse to pay other members their share of VAT profit

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A client is a courier. All of the couriers originally were paid directly by the contractor that they worked for. The contractor then changed the rules and insisted that all couriers had to become members of an LLP through which the couriers were subsequently paid. The couriers must accept this situation or seek self-employment elsewhere. The LLP is VAT registered and accounts for VAT via the flat rate scheme , 10% for couriers. The designated members are not couriers, they simply administer the LLP. It's the courier members who incur all of the expenses that justify the 10% flat rate, yet the designated members pocket all of the resultant profit; they even refuse to pay VAT to VAT registered members. I'm considering taking it to a small claims court. Any thoughts on the legality of the designated members' actions? 

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Stepurhan
By stepurhan
30th May 2019 12:35

What does the partnership agreement say?

In many respects, LLPs operate in the same way as partnerships. The partnership agreement would say how profit shares are determined.

Still an issue for a solicitor rather than an accountant though.

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Replying to stepurhan:
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By GLKK
30th May 2019 14:07

I've had some communication with them and have managed to get them to state in writing that the members get their profit share (I believe that should include the profit from the 10% flat rate).
They've also stated that there is no written rule of the LLP that the members cannot receive some of the VAT income.
I've checked the filing history and it appears that the designated members are entitled to surplus assets in the event of a winding up.
There is no specific mention anywhere of share of profit being restricted to the net of VAT amount only.

I'm hoping that the designated members have provided enough in their written responses to me for me to go to the small claims court.
I was just wondering if anyone had previous experience of this situation.

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Replying to GLKK:
Hallerud at Easter
By DJKL
30th May 2019 14:19

Methinks the small claims may not be that useful, frankly I do not know , as the members receive distributions of profit rather than the sums being due to them as a creditor, have you determined that it will even have jurisdiction?

The route you are proposing may possibly turn out to be long and expensive, I suspect a legal rather than accounting forum, or better yet a solicitor, might be a more accurate port of call re determining the realistic art of the possible.

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Replying to GLKK:
Stepurhan
By stepurhan
30th May 2019 15:26

A written statement that they get their profit share is worth nothing if it doesn't say how that profit share is determined. The lack of detail on how VAT is treated with regards to calculating that share in your other comments implies there is no fixed way of determining the share.

This could simply be a case of sharp practice where the couriers have signed up to a bad deal but have no legal recourse. IANAL but the facts you've given do not persuade me you would be successful in the small claims court.

Only professional legal advice will say if you have a leg to stand on.

As an aside, anyone else's previous experience is unlikely to be helpful. Unless the details are identical (which is unlikely) the differences may be enough to change the answer for something like this.

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By Vile Nortin Naipaan
30th May 2019 13:01

Ooh look. A can of worms.

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By paul.benny
31st May 2019 11:51

Why are you considering taking it to court? You're not a party and have no rights in the matter.

If you're advising your client to go to court, that's a different matter. As I'm not a lawyer, I would hesitate to give legal advice to a client.

I'd also how much is at stake for your client, how much it might cost to recover it, and what it will do to the relationship with the contractor. It may be better (=less costly) to walk away.

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By Mr_awol
31st May 2019 12:00

You seem to be working under the assumption that this is a 'real' partnership/LLP and the members will all get their even share of the profits less overheads.

Is it not the case that actually the designated members are the 'employers' and the other members are the drivers/'employees' and that the whole thing is set up primarily to safeguard the s/e status of the workers?

It may or may not be fair, but I doubt there is much if anything the workers can do about it - depending of course on the agreements put in place.

If the client is unhappy surely youd send him to a solicitor rather than "considering taking it to a small claims court" yourself?

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Replying to Mr_awol:
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By Vile Nortin Naipaan
31st May 2019 15:02

Mr_awol wrote:

... and that the whole thing is set up primarily to safeguard the s/e status of the workers?

It may not even achieve that, and if it does, there's then the issue of whether the agents or intermediaries legislation applies.

This sounds like an HMRC field day waiting to happen!

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By Paul D Utherone
31st May 2019 16:11

Presumably the LLP has matters in hand to make sure courier members are not caught by the Salaried member rules and taxable under PAYE anyway?

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