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Salaried Member LLP: private tuition VAT exempt?

Can private tuition provided by a Salaried Member (partner) of an LLP be considered VAT exempt?

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More than one stage school franchise recommends setting up as an LLP. One factor for this choice is to be able to claim VAT exemption under the private tuition rules and avoid the need for VAT registration.

If a stage school forms an LLP where one partner retains control with risks/rewards, and other partner(s) are fixed Salaried Member partner(s) with little/no control, this would mean that you need to treat the other partner(s) as a Salaried Member(s) per the 2014 ITTOIA rules and run PAYE for them (which would be fine).

My question: is a Salaried Member of an LLP NOT an employee (Salaried Member rules are income tax rules independent of employment law?), and so can the Salaried Member's private tuition income to the LLP still be regarded as exempt for VAT?  Or if they are a 'deemed' employee per the ITTOIA rules, then it would fail the VAT act "individual teacher acting independently of an employer" test?

I want to understand if an LLP will just exempt the controlling partner's tuition income when considering the VAT threshold, or if all partners' tuition income can be exempted.

[VAT act: "The supply of private tuition, in a subject ordinarily taught in a school or university, by an individual teacher acting independently of an employer."
LLP provisions in 2014:Income Tax (TOI) Act 2005 (ITTOIA): "If an individual member should, under the terms of the ITTOIA, be taxed as an employee, rather than a partner, they are described as a 'Salaried Member' of the LLP."
Interpretation from another accountant's website: "It is worth noting that the Salaried Member rules are income tax rules and that they are entirely independent to employment law and the employment rights that employees enjoy."  ]

Replies (8)

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By David Ex
07th Nov 2021 11:36

The usual mantra for VAT questions is “who is supplying what to whom?”.

I have zero knowledge on the point, so may be miles off, but I can’t see how you can claim to be an LLP providing a service but, at the same time, claim a relief available to individuals.

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Replying to David Ex:
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By janelm
07th Nov 2021 16:40

Thanks for your response. Partners of unincorporated partnerships or LLPs providing private tuition are included within the VAT exemption, though I assume this is on the basis of a 'full risks and rewards' type of owner-partner.

This website tells Stagecoach franchises to register their teachers as partners to avoid VAT and PAYE etc, but that you remain 100% in control of your partnership. The client passed on this website in asking me about it.
https://taxdataltd.com/stagecoach-franchises/

I was trying to understand how it could be legitimate, and it does feel like there might be a gap in the tax law if a 'Salaried partner' paid under PAYE is not actually an employee because it is not employment law. If there is a gap then it seems unintended. However, I think it likely that VAT would be able to challenge it under "by an individual teacher acting independently of an employer" and wondered what others thought.

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Replying to janelm:
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By David Ex
07th Nov 2021 17:36

janelm wrote:

Thanks for your response. Partners of unincorporated partnerships or LLPs providing private tuition are included within the VAT exemption, though I assume this is on the basis of a 'full risks and rewards' type of owner-partner.

This website tells Stagecoach franchises to register their teachers as partners to avoid VAT and PAYE etc, but that you remain 100% in control of your partnership. The client passed on this website in asking me about it.
https://taxdataltd.com/stagecoach-franchises/

I was trying to understand how it could be legitimate, and it does feel like there might be a gap in the tax law if a 'Salaried partner' paid under PAYE is not actually an employee because it is not employment law. If there is a gap then it seems unintended. However, I think it likely that VAT would be able to challenge it under "by an individual teacher acting independently of an employer" and wondered what others thought.

I should avoid giving my views when I’m underqualified (on the subject)!

Not sure whether the partnership might be deemed to be a sham - and if that would be fatal to the arrangements.

The linked site says:

“… the teachers in the partnership are partners in name only …”

and “To avoid a challenge from HMRC we suggest you pay your partners based on the timesheets they send you (not invoices) and you pay them a percentage so it cannot be said that their earnings are entirely based on hours worked.”

So certainly “structured” (or contrived, if you’d rather). Whether that’s sufficient to avoid an employment challenge, I don’t know!

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Replying to janelm:
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By The Dullard
07th Nov 2021 17:12

I'm not convinced that members of an LLP would necessarily qualify for the private tuition exemption, to be honest. I dare say that there are many that are operating through an LLP and treating their supplies as exempt, and have gone without challenge from HMRC, but that doesn't make them right.

An LLP is a body corporate legally, and the direct tax legislation makes specific provision for LLPs to be taxed transparently (if they're carrying on a business), but then bring members on a fixed profit share within the realms of PAYE.

Whilst VAT law doesn't explicitly do the second of those things, the reason for that is that it doesn't do the first of those things. An LLP can be a member of a VAT group, for example.

It has been held that tuition provided by a subcontractor does not qualify for the exemption. I don't imagine that it would be hard for HMRC to show that that is the economic reality of a "partner" that's on a rate.

Also, whilst there is specific provision for LLP members on a fixed profit share to be taxed as employees, but no corresponding case law for general partnerships, there is a body of case law where partners on a fixed profit share have been held to be employees in reality.

Of the individuals behind the entity in your link, none of them have tax qualifications beyond ATT, and there's only one of them.

Don't expect going down this route to be a waltz in the park.

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By Jason Croke
08th Nov 2021 09:45

HMRC confirm here https://www.gov.uk/hmrc-internal-manuals/vat-education-manual/vatedu40200 that "the exemption applies equally to partners in limited liability partnerships."

It then goes on to say https://www.gov.uk/hmrc-internal-manuals/vat-education-manual/vatedu40300 that "The following are excluded from the exemption - Supplies of tuition carried out by employees."

That is as far as the internal guidance goes but makes a distinction between partners and employees. As The Dullard has posted above, probably loads of structures like this, but doesn't mean they work.

The basis of the private tuition exemption is that the tuition is performed by an individual, in their capacity as an individual (sole trader) or as a Partner within a Partnership or as a Partner within an LLP.

Where an employee performs tuition, they are not doing it in their own name, but on behalf of their employer, so if you had a Partnership of say husband and wife and they had 5 employees, the employees are not making a supply of private tuition directly to the pupil, they are making a supply as employee to their employer (the Partnership) . The husband and wife can exempt their supplies but not the supplies of their employees.

This is confirmed in HMRC Notice 701/30 section 6 https://www.gov.uk/guidance/vat-on-education-and-vocational-training-not... - "If the teacher is a sole proprietor or member of a partnership and the subject is one taught regularly in a number of schools or universities and takes on a teacher or teachers to help in carrying out the instruction then it’s an exempt supply of private tuition....even though the tuition delivered by teacher (as sole proprietor or partner) may still qualify as exempt private tuition, the tuition that others deliver is standard-rated."

Coming to the ITTOIA, I agree that for income tax purposes, the legislation has three rules which determine whether the Partner is truly a Partner or an employee (disguised salary, significant influence, capital contribution) and where the conditions are not met, the "Partner" is taxed as an employee.

Whilst the ITTOIA only applies to income tax, nonetheless, it confirms that where the salaried member rules apply, the other "Partners" are employees and on that basis, my initial view is that the structure fails - to a degree - as the VAT guidance states you cannot be an employee and benefit from the education exemption.

It's clearly contrived, based on the link, apart from the spelling mistakes, it tries to gloss over the disguised salary condition A, by saying pay them a variable amount, and as all three conditions must be met, then it is possible to avoid the salaried member rules by breaking just one of them, such as the variable pay/condition A.

I think it is theoretically possible to achieve education exemption within an llp, on the basis that the disguised salary rules don't apply, but the weak spot is condition A of disguised salary rules. Even if the disguised rules can't apply for income tax, HMRC may still take a view that a salary indicates an employee relationship for VAT purposes, so the battle would be whether HMRC have to prove all three conditions under ITTOIA to then attack the definition of employee for VAT purposes under VAT exemption.

Like all clever tax planning, it only works until it doesn't (film partnerships, etc). I know the weblink says the ITTOIA only applies to income tax, but I think it is dangerous to assume HMRC will not try and argue they are employees, especially when the weblink refers to them as "partners in name only!"

It may be possible to achieve the exemption, but I don't think it is as easy as the link indicates it is, the risk lays with Condition A, the weblink says pay them a variable amount based on timesheets, I'm not sure if that is sufficient to defend against Condition A (I'm not an income tax expert), but it feels a bit like when trying to artificially split a business to avoid VAT registration by advising the client to have two different letterheads, it's not enough on its own, you need a basket of things to protect against attack, so letterhead, different bank accounts, etc....and the same may well apply here to defend against disguised salary.

I think HMRC haven't really twigged about this sort of structure and is possibly too difficult for them to identify, as without looking into the employment status, HMRC will just see a perfectly acceptable LLP making exempt supplies.

OP - are you satisfied the disguised salary rules for an LLP have been sufficiently dealt with by simply varying the amount the fake partners are paid? Because I think that is the first risk/issue for the client.

The VAT answer will then present itself once the employee status under ITTOIA is clarified, but even if ITTOIA is achieved, I suspect there will always be a cloud hanging over the business, because the structure is clearly designed to bend the rules of both disguised salary and VAT exemption, there will always be a risk that HMRC ignore the ITTOIA rules and argue the partners are employees by virtue of them being paid like an employee, regardless of ITTOIA applying....or it may be that HMRC have to prove disguised salary first before they can then attack the VAT.

If you are advising on the structure then make sure it is as robust as possible and certainly not as flippant as the weblink seems to think it is.

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Replying to Jason Croke:
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By janelm
08th Nov 2021 10:22

The client who sent the link is currently a sole trader, below VAT threshold due to COVID. Their own tuition income is fine for the exemption but the other teachers income to the business may exceed the threshold in the next year. I have yet to discuss if they want to consider taking on a full risks/rewards minority partner from among the teachers which could help, but suspect they are more likely to want to keep full control.

A separate prospective client is thinking of buying into a similar franchise that is operating around 80k turnover (has been told by franchisor can only be Ltd or that LLP may be better for VAT purposes, cannot be sole trader or unincorporated partnership) was looking for advice and a quote.
If a 'partner' for an LLP is a family member, technically with full risk/rewards etc but in practice not active in the business, is this sufficient to use an LLP and at least exempt the primary partner's tuition income? If forced to be a Ltd company then VAT registration is likely to be unavoidable in this case.

I found the advice in the link problematic, and no I don't think the disguised salary rules can be dealt with by varying amounts paid while keeping 100% control of the business. I wanted to understand better before suggesting possible ways forward, as I don't think I will choose to offer the service detailed on the link but wanted to be able to explain why as fully as possible and point out the risks involved. The responses here have been very helpful, thanks.

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Replying to janelm:
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By jonharris999
08th Nov 2021 10:54

Very useful thread all, thank you.

I recall that a few years ago, one such big-market-segment franchiser was the fastest-growing franchise in the UK. This is a much bigger market than it might appear, and I wonder how many franchisees are exposed here because as @Jason has brilliantly explained, there's more to it than meets the eye.

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By AndyC555
08th Nov 2021 13:01

FWIW, Julie Butler looked at this in the September 2013 edition of practical VAT newsletter (albeit in connection with horse riding lessons) and concluded that HMRC were taking a dim view of such LLPs and concluded that whilst genuine proprietor Members of an LLP would fall within the VAT exemption, 'employee' Members would not.

I suspect the stage school franchises offering the advice are relying on the glib "just pay them a percentage" line as getting round this.

But it looks like this is something HMRC were onto when they introduced the new LLP rules back in 2014 so as is mentioned elsewhere, expect HMRC to kick back if they look into things.

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