Prior to these changes there was an automatic presumption that members of LLPs were self-employed. However, HMRC’s perception was that LLPs were being used to exploit this presumption of self-employment in some cases. Where these new rules apply their effect is to treat affected members as if they were employees for tax and NIC purposes. The most significant impact is that the LLP will have to pay class 1 employer’s national insurance contributions of 13.8% on salaried members’ remuneration.
The new rules will only apply to those members who meet all three conditions, A, B and C, as defined in the Finance Bill. The easiest condition for many members to ‘fail’ (and therefore avoid salaried member status) is Condition C. To do this, the member’s contribution to the LLP has to be at least 25% of the disguised salary the member expects to receive for the tax year in respect of their services to the LLP. As a result, many members will have had to agree to introduce additional capital to the LLP. Provided such an undertaking was made by 6 April 2014, the additional capital does not actually need to be introduced until 5 July 2014. This relaxation allows existing members time to organise the necessary finance. Clearly the 5 July 2014 deadline is now approaching, so members and LLPs need to make sure they meet this deadline if they are relying on failing Condition C. In the event a member fails to introduce the additional capital needed, they will be treated as an employee from 6 April 2014 (unless they can instead fail either of Conditions A or B).
The salaried members’ rules could easily be overlooked for future new members, so it would be sensible for LLPs to build a requirement for appropriate capital contributions into the LLP agreement or other documentation/ processes.
In addition, the test in Condition C needs to be re-determined whenever:
- There is a change in the contribution (although if it is an increase in required contribution where Condition C had already been failed then, provided all other circumstances are the same, no retest will be needed as clearly Condition C will continue to be failed); or
- There is, otherwise, a change in circumstances that might affect whether Condition C is failed or met.