Disguised Employment? - HMRC Review Of Certain Tax Treatments Of Limited Liability Partnerships And 1890 Partnerships LLP Members

On 20 May HMRC published a consultation document to review two aspects of the current tax treatment afforded to members of Limited Liability Partnerships and 1890 Partnerships:

(i) the presumption that members are self-employed for tax purposes, so called 'disguised employment', that is, HMRC's attempt to tackle their perceived abuse of membership of LLPs to avoid employment taxes; and

(ii) perceived manipulation of profit and loss allocations to generate a tax advantage by, for example, the use of corporate members by both LLPs and general partnerships (for further details please see ' Corporate Members - Manipulating Profit and Loss Allocations?')

This briefing note addresses issues arising from part (i) of the Consultation.

The Current Position

The current tax rules as applied mean that individuals who are members of an LLP are taxed as self-employed, and therefore the LLP is not required to operate PAYE for members, nor pay Employer's National Insurance Contributions. A small number of cases have (largely unsuccessfully) challenged this presumption of self-employment. These cases have usually been brought by individual members seeking employment law protection, which is more favourable to an employee than that available to a self-employed member. The recent case of Tiffin v Lester Aldridge LLP [2012] EWCA Civ 35 outlined various factors which would indicate that a member of a LLP is a 'partner' rather than an employee. These factors all include some element of risk, where a member has: a share in the profits of the LLP; a prospect of a share in the surplus of assets on a winding up; contributed to the LLP's capital; and/or assumed some role in the management of the business.

The Consultation

HMRC is concerned to prevent a member of an LLP benefiting from self-employed status if the terms of his or her relationship with the LLP would otherwise amount to employment for tax purposes. HMRC provides the following examples: members who are engaged on standard terms as part of a mass recruitment exercise; or employees of a company who then become members of a successor LLP on essentially identical terms. The proposal is to remove the tax presumption that all members of LLPs are self-employed and in some cases, deem that a member is an employee for tax purposes. HMRC's proposal is that a member's status will be assessed on the basis of two conditions and if an individual member meets either condition he or she will be classed as a 'salaried...

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