HM Revenue & Customs has now published revised guidance on the new legislation for taxing certain members of UK limited liability partnerships (“LLPs”) as employees, available here. The “salaried members” rules will take effect from 6 April 2014, despite calls for a delay to allow time to assess their impact, and will form part of a wider reform of the UK tax treatment of partnerships. Fund managers and other businesses operating in the UK through LLPs and partnerships are urged to review their arrangements in light of these changes.
What is the aim of the salaried members draft legislation?
The new legislation removes the presumption that a member of a UK LLP is self-employed for UK tax purposes and instead will tax members as employees if their terms of engagement have certain hallmarks of employment.
What are the consequences of the draft legislation applying?
Where the rules apply to a member of an LLP, the LLP will be liable for 13.8 per cent National Insurance contributions on that member’s pay and benefits. The LLP will also have the compliance burden of operating PAYE for that member. Other consequences may follow for any affected member.
To whom will the new rules apply?
Those carrying on business through a UK LLP, for example fund managers and professional service firms, are potentially caught by the new legislation and should review their arrangements.
Under the draft legislation, a member of an LLP will be taxed as an employee if all the following conditions are satisfied:
What are the key points for fund managers in the new HMRC guidance?
- it is reasonable to expect that the amounts payable by the LLP to the member for services performed for the LLP will be wholly or substantially wholly (i.e., at least 80 per cent) “disguised salary”. Disguised salary is an amount which (i) is fixed, or (ii) is variable provided that it is varied without reference to the overall profits or losses of the LLP or (iii) is not in practice affected by the overall profits or losses of the LLP;
- the member does not have significant influence over the affairs of the LLP; and
- broadly, the amount of capital contributed by the member to the LLP is less than 25 per cent of the disguised salary that the member receives within the relevant year.
- Guaranteed payments will constitute “disguised salary”.
- Performance bonuses which are computed by reference to a share of the firm’s total profits will not necessarily be caught by Condition A as disguised salary, however remuneration which is based only on an individual’s personal performance (e.g., that member’s own client portfolio) will meet Condition A.
- Discretionary bonuses may constitute disguised salary, depending on whether or not an award represents a share of the profits of the LLP.
- The new guidance provides a number of new examples where UK LLPs form part of international structures. In particular, HMRC now appear to take the view that arrangements involving an LLP being paid a service fee which is calculated by reference to the performance of an overseas affiliate (e.g., a US parent fund manager) will give rise to disguised salary for the LLP’s members.
- HMRC will accept that a member of an FCA authorised LLP who is approved to perform a “significant influence function” (i.e., the CF3 chief executive function or the CF8 apportionment and oversight function) is likely to have significant influence for the purposes of Condition B. However, the fact that a person is approved to perform the CF4 partner function will not be considered, of itself, to imply that the person has significant influence. It will therefore be necessary to demonstrate that a person approved to perform the CF4 partner function has additional duties that confer significant influence.
What are the other partnership UK tax reforms?
The salaried members legislation is part of a package of new legislative provisions that will apply to LLPs and other partnerships from 6 April 2014, although certain anti-avoidance provisions take effect earlier than that. The other rules are:
- the “mixed partnership” rules, which will apply to an LLP or partnership with both individuals and persons that are not individuals (e.g., companies or partnerships) as its members/partners. These rules are intended to counter arrangements for diverting income to non-individual members/partners, who may be taxed at a lower rate, or allocating losses to individual members/partners. Where certain conditions are met, the provisions can require tax adjustments to the profit and loss sharing arrangements of the LLP or partnership;
- rules relating to the taxation of deferred remuneration of partners or members following AIFMD; and
- rules relating to that transfer of assets and income streams through partnerships.
If you would like assistance in understanding how these changes may impact your business, please do not hesitate to contact any of the authors of this alert or your usual Bingham contact.