Transferring Employees from Limited Co to LLP

Implictions of moving employees only from Limited Company to LLP

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I have beed advised of the possiblity of saving tax by transferring some or most of the employees from my limited liaiblity company to a newly established LLP. The key saving is on NI as the employees would become self employed in the LLP. The LLP would then provide services to the limited company for a fee. 

Is this a common structure? Are there any accountants or businesses that specialise in doing these? I would like to get more information. 

There must also be negative implications for employees as they would lose employement rights, I assume. 

Thanks

Replies (34)

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By Ruddles
24th Jan 2024 12:26

Martin O'Donoghue wrote:
I have beed advised

Where did you receive this advice? The Dog and Duck?

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Replying to Ruddles:
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By Martin O'Donoghue
27th Feb 2024 17:41

Let me guess - you're the duck?

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By David Ex
24th Jan 2024 12:29

If you want employment law advice, probably best to speak to an employment lawyer.

I’d start there before doing anything else. Not sure employees would be too thrilled to lose their employment rights but I might be wrong.

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Replying to David Ex:
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By Martin O'Donoghue
27th Feb 2024 17:46

It's a tax issue, not a legal issue. Thanks though....

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Replying to Martin O'Donoghue:
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By FactChecker
27th Feb 2024 20:48

"It's a tax issue, not a legal issue" isn't exactly true (or at least not the full picture) is it?

You mention (further down) that: "I'm a dual qualified, Legal 500 ranked lawyer with 20+ years M&A experience" ... but make no mention of your knowledge or even experience of UK Employment law, which is highly pertinent to your question (that asked about any 'implications' of your plan).

The impact (even if achievable) of the proposed 'conversion' to an LLP structure may not appeal to many of your current employees (some of whom I have to presume make an important contribution to the business) ... and, most importantly (as you will know from the case you mentioned), it is not a simple matter to construct contracts such that HMRC will accept a self-employed status for all your ex-employees.

So, without a detailed exploration (not for a public forum) of how the LLP would work and the plan for 'migrating' to it, it's not worth spending time on a tax 'issue' that may fluctuate as those other details come to light.

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Replying to FactChecker:
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By Leywood
27th Feb 2024 21:31

Plus this isn’t a place for free tax advice for businesses.

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RLI
By lionofludesch
24th Jan 2024 12:32

Good luck with this plan.

Be sure to let us know how it went.

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Replying to lionofludesch:
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By Martin O'Donoghue
27th Feb 2024 17:42

I can only find one company doing this: https://optimalcompliance.com/partnership-model

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paddle steamer
By DJKL
24th Jan 2024 12:53

What do the current employees of the company say about this?

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Replying to DJKL:
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By lionofludesch
24th Jan 2024 12:55

DJKL wrote:

What do the current employees of the company say about this?

Pleased with their redundancy pay?

It's an ill wind that blows no good.

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Replying to lionofludesch:
paddle steamer
By DJKL
24th Jan 2024 13:19

I think they may be able to aim higher, wrongful or unfair dismissal perhaps, one of these is capped but not sure the other one has any limit.

Years since I dealt with these issues, last time family had any claims to deal with my total input was to find a lawyer to represent my prospective son in law (though not sure that is what he is, daughter's other half maybe is more appropriate description as wedding does not seem to be on horizon (Yipee- no wedding cost for me)

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By paul.benny
24th Jan 2024 13:34

This is such a hare-brained idea that I don't know where to start commenting on it.

Please do tell where you have seen this proposed, because I can't see any circumstance in which this would makes sense for any regular type of business or its employees.

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Replying to paul.benny:
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By Martin O'Donoghue
27th Feb 2024 17:42

Here is where I have seen it: https://optimalcompliance.com/partnership-model

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Replying to Martin O'Donoghue:
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By Martin O'Donoghue
27th Feb 2024 19:20

It's not hair-brained. HMRC challenged the structure, and it was upheld by the supreme court in the Hart case.

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Replying to Martin O'Donoghue:
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By paul.benny
29th Feb 2024 14:44

You're suggesting substantially all of your employees would become LLP members. I know nothing of the make up of this group, but yes, it's hare-brained. (hare not hair)

It's hare-brained because employees would relinquish all of their employment rights - paid holidays, the various statutory leave, severance pay, many of the protections against dismissal. Even though some could doubtless written into the partnership agreement, enforcement would require costly litigation rather than a ET.

It's hare-brained because the employer loses their rights to terminate. Again, possibly these could be written into the partnership agreement.

It's hare-brained because the more you try to replicate the terms of an employment contract, the more the supposed partnership starts to look like a sham.

It's hare-brained because requiring new hires to join as a member of the LLP structure is likely to be an obstacle to recruitment. I would certainly hesitate and seek independent legal advice beforehand. Actually, I wouldn't want to pay for advice before starting a new job so would decline your offer.

But as we now know, you're a lawyer, and maybe you know better than me on those points. Still leaves all the tax risk, though.

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Stepurhan
By stepurhan
24th Jan 2024 13:48

I think you will find the Employer NI saving more than wiped out by the increased amount you would need to pay your employees to compensate for their loss of employment rights.

That is ignoring the point others have made that your employees may not agree to the arrangement at all. Huge cost saving if everyone leaves the company because they don't trust you any more.

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By carnmores
24th Jan 2024 13:53

who advised you of that? have you heard of TUPE ? your mixing everything up. if a new 'company' was to engage the old company's employees ton a freelance basis they would have to be dismissed by old company and the likelihood is that they would have a case for unfair dismissal.

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Replying to carnmores:
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By Martin O'Donoghue
27th Feb 2024 17:44

Yes - I've heard of TUPE - I'm a dual qualified, Legal 500 ranked lawyer with 20+ years M&A experience. TUPE has absolutely no relevance whatsoever to this issue. Please stop sending insulting and unhelpful replies.

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Replying to Martin O'Donoghue:
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By Leywood
27th Feb 2024 21:32

Where is the insulting comment?

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By FactChecker
24th Jan 2024 13:55

Can't imagine why everyone is being so mean ... OP has yet to introduce the follow-up advice (gleaned in the pub car-park afterwards) about 'locating the LLP overseas'?

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Replying to FactChecker:
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By Martin O'Donoghue
27th Feb 2024 17:51

This is a structure validated by the Supreme Court.... but not widely used...

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Replying to Martin O'Donoghue:
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By MJShone
29th Feb 2024 07:36

When you say "validated by the Supreme Court" what was the issue? Please would you provide a case citation? As I've said in other responses, it's not that an LLP with no employees isn't possible - it's just that it may not be desirable. The days when you could simply turn an employee on £50k into an LLP member on £50k to save employer NIC are gone. The tax/NI isn't as straightforward as that now. (That's ignoring all the employment law implcations that might worry an employee, which I think have lessened over the years, but that's not my area.)

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By MJShone
24th Jan 2024 14:06

"the employees would become self employed in the LLP"

Pre 6 April 2014 maybe, but ask whoever advised you about this to explain why it doesn't fall foul of the Income Tax (Trading and Other Income) Act 2005, s863 A-G. As FactChecker says, maybe it's not a UK LLP that's proposed...

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Replying to MJShone:
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By Martin O'Donoghue
27th Feb 2024 17:45

Thanks - it's a proposed UK LLP. Interestingly, the supreme court upheld the validity of the structure but I do not see many using it, and I wonder why.

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Replying to Martin O'Donoghue:
RLI
By lionofludesch
27th Feb 2024 18:28

Martin O'Donoghue wrote:

Thanks - it's a proposed UK LLP. Interestingly, the supreme court upheld the validity of the structure but I do not see many using it, and I wonder why.

It's not everyone who wants to be a business partner.

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Replying to Martin O'Donoghue:
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By MJShone
29th Feb 2024 07:19

The structure's perfectly valid - but the old model whereby you could have everyone in the firm as a member of the LLP and at the same time the income of many members of an LLP could be very largely fixed (much like an employee) doesn't work unless it passes (or strictly fails) the tests in ITTOIA 2005 s863 A-G. I see the link you provide talks about injecting capital -presumably that's the soluction to the s863 A-G issue. The LLP would have to build in the cost of that capital, of course, if it's going to compensate the members for it. However, theoretically, it works. However, theory and practice are quite different - maybe the implications of putting this into practice are what puts people off.

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Replying to Martin O'Donoghue:
Stepurhan
By stepurhan
29th Feb 2024 16:37

Martin O'Donoghue wrote:

Thanks - it's a proposed UK LLP. Interestingly, the supreme court upheld the validity of the structure but I do not see many using it, and I wonder why.

Because it is not as simple as just moving your employees into an LLP and calling it a day.

It relies on the team having real input and getting a real share of the profits the structure generates. Mainly because, as several people have pointed out, moving to an LLP removes employment rights. Even the link you shared understands this.

As a lawyer with the experience you claim, surely you understand that you can't modify a contract without agreement of both parties. Have you even discussed this with proposal with your employees?

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By nrw2
24th Jan 2024 15:25

If this worked, surely everyone would do it?

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Replying to nrw2:
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By Martin O'Donoghue
27th Feb 2024 17:50

Not that straightforward....there's a lot of elements to consider....

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Replying to Martin O'Donoghue:
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By MJShone
29th Feb 2024 07:29

Quite - I suspect that's why it's not done more. The link you provide is to someone who's marketing it. I'm sure there are lots of law firms/accountants/combinations who could implement it. However, in most cases, once the implications of the arrangement had been explained the client would decide against it.

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By Rammstein1
24th Jan 2024 15:58

Sad to say but I've seen this done against my advice.

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Replying to Rammstein1:
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By Martin O'Donoghue
27th Feb 2024 17:49

Is there a firm that does this? Please let me know. Thanks

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Replying to Martin O'Donoghue:
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By FactChecker
29th Feb 2024 13:30

You seriously expect a professional who has stated that they have advised (a paying client) NOT to do it, nevertheless to assist in the promotion of such a scheme?

Irrespective of whether any scheme works ... the aspect seemingly forgotten by most in the excitement that they're about "to save money" is that the all the costs are usually upfront (and irrecoverable), whilst the liabilities if/when 'things go wrong' remain with the client forever - or until discharged (by them but never by the promoter).

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By JCresswellTax
29th Feb 2024 09:51

hahahahahahahahaha

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