Member of LLP couldn’t also be its employee
Wilson argued that he was an employee of Haines Watts LLP, and so was not liable to class 2 and 4 NIC, which HMRC assessed in respect of payments he received from the LLP.
Peter Wilson had been a partner at several accounting firms and has a PhD in tax law. He joined Haines Watts in November 2011 to develop their international tax department. He left in March 2014.
On joining Haines Watts, he signed an LLP agreement, a deed of variation, and received a side letter that further varied the LLP agreement (collectively the “November documents”).
In his 2011/12 and 2012/13 tax returns, Wilson recorded the income he received from Haines Watts as profit from a partnership. In his 2011/12 return, he claimed a deduction of £9,562 against his partnership share of profits. Wilson knew at the time of submitting that tax return that he would not have been able to claim the deduction as an employee.
In his 2013/14 return, he declared employment income from Haines Watts and provided a disclosure note stating that he believed that he was an employee of Haines Watts in that tax year although he was a fixed income member. The same note also stated that he believed he was an employee of Haines Watts for tax purposes in 2011/12 and 2012/13.
The November documents
The FTT placed greater weight on the November documents themselves and reduced the weight given to Wilson’s evidence, finding it to be unreliable regards the deal struck with Haines Watts about his pay.
The deed of variation removed certain voting rights from Wilson, but others remained under the LLP agreement. Wilson also received a profit share, as set out in the deed of variation. This included a profit share of £180,000 (a “first charge” on profits), subject to a number of adjustments.
While Wilson accepted that he was a member of Haines Watts LLP, he argued that he was also employed by Haines Watts, and his income comprised earnings from his employment rather than a share of the profits of Haines Watts’ trade or profession. Consequently, it was Haines Watts’ responsibility to pay the NIC and income tax arising on payments made to him.
To support this claim, he relied on factors such as his lack of capital contribution, limitations on his voting rights, and the fact that his first charge over profits would not be reduced if there were insufficient profits to pay out all the first charges.
HMRC contended that Wilson was self-employed throughout his engagement with Haines Watts, and was therefore responsible for paying his NIC and income tax. HMRC argued that while the deed of variation removed Wilson’s voting rights in respect of certain matters, they remained for others. HMRC also put forward that Wilson had gone to considerable lengths to argue that the LLP agreement should not be applied according to its terms.
This case concerned the NIC position only; HMRC agreed to stand over the collection of income tax until the final determination of this appeal [TC07716].
The FTT initially dismissed Wilson’s appeal on the basis that he was taxable on the payments made to him under the partnerships code by merit of ITTOIA 2005, s 863.
The FTT provided further grounds as to why the appeal must be dismissed.
Both employee and member of the LLP
For Wilson’s appeal to succeed, he needed to show that he could be an employee of the LLP for tax purposes (noting there is a difference in employment status for employment law and tax purposes), despite also being a member of the LLP. Drawing on previous cases, in particular Clyde & Co and Altus, the FTT determined that a person cannot be an employee for tax purposes when a member of an English LLP, and so the appeal would fail on this count.
Nature of payments to Wilson
The FTT noted that, even if a member of an English LLP could be an employee of that said LLP, the taxpayer still needed to show that the payments made to him were in relation to employment by Haines Watts and not in relation to his membership. On this basis, the appeal would also fail. The payments were made to Wilson as a member of Haines Watts, and as a partner in a partnership, not as an employee.
Ultimately, the FTT rejected Wilson’s notion that his membership was “hollowed out” and in some way ineffective. He had significant rights and obligations as a member under the November documents. Further, Wilson’s entitlement to be paid only applied where Haines Watts made a profit; he was not entitled to an “above the line” salary.
The appeal was dismissed.
Haines Watts actually paid the income tax and NIC due on Wilson’s payments as a self-employed earner/member of an LLP to HMRC for 2011/12, and also made payments on account for 2012/13. The FTT made the point that these payments had no bearing on whether the underlying payments were taxable as self-employed earnings as a member of an LLP or not.
The payments at the heart of this appeal were made before the introduction of FA 2014 s 74 that include the salaried member rules, and the National Insurance Contributions Act 2014, which changed the taxation of LLP partners.