An ‘LLP’ to bypass IR35? Try, but you risk ‘Likely Long-term Problems’ with HMRC

Only this month we heard from HMRC in a new report into marketed tax avoidance schemes that 20 per cent of all known schemes are listed under book-keeping activities, including ‘umbrella companies.’

But this is a misnomer because tax avoidance scheme-providers only masquerade as ‘umbrella companies.’

The new kid on the shady block

Now though, there is a new kid on the shady block -- providers that claim to provide greater tax efficiencies than umbrella companies and greater insusceptibility than limited companies to IR35 – an LLP payment model, writes former tax inspector Carolyn Walsh, director of CWC Accounting Solutions.  

From what I can make out, someone has clearly watched the contractor market of late, having spotted the misconceived idea that umbrella companies deduct double NI contributions, and decided the time is apparently right to break out a new scheme, using ‘anti-umbrella’ company sentiment as a selling point. In light of a Moneybox probe into umbrellas, the new kid must be thanking his or her lucky stars in terms of their timing!

How does the LLP ‘model’ claim to work?

The LLP payment model is a simple enough concept.

The provider sets up Limited Liability Partnerships and processes payments to LLP ‘partners,’ and when payments are processed fully under PAYE, the LLP is not caught by IR35. It’s therefore an LLP model that falls outside the off-payroll legislation. So far so good.

But what of the provider’s promised tax efficiencies, and insistence that merely setting up an LLP gets around the IR35 rules?  

Fail number one

Well, if an LLP partner’s income is not paid as employment income, the LLP is an ‘intermediary,’ so that’s FAIL NUMBER ONE. This falls in scope of IR35, short and simple. 

These LLP schemes doing the rounds appear to pay each partner’s income under PAYE, providing access to tax efficiencies through an expense policy.

However, it is not possible for individual LLP partners to make personal expense claims. This is because revenue expenditure incurred by a partner only qualifies for relief if it is made “wholly and exclusively” for the purposes of the partnership business.

Fail number two

So individual partners cannot submit expense claims to reduce personal tax on a week-by-week basis. But it seems this is the expectation of scheme users. That’s FAIL NUMBER TWO. 

So far, the LLP payment model is looking like it has the makings of a tax avoidance scheme which needs to be registered under DOTAS, given its claim of being an arrangement which is expected to provide a tax advantage. The schemes I have seen also fall within a number of ‘hallmarks’ which HMRC has warned us all about e.g. glossy or slick marketing campaigns, standardised tax products and of course, employment income being paid using a third-party! 

What the users apparently say

These are some ‘customer reviews’ being touted and used for marketing by one such scheme seen this week. To me, they raise just about every red flag that the Revenue has said contractors should run from if they ever see hoisted.

• ‘A payment solution that is way more tax-efficient than these dodgy umbrella companies getting around IR35 by employing people...’ 
• ‘This company is genuine, and you earn more than any umbrella - fact...’ 
• ‘I was thinking it’s too good to be true, but it’s not and it’s 100% compliant, I can earn more than with an umbrella’...

IR35 debt in all but name

Generally-speaking, if a scheme provider uses relevant tax legislation in a way it wasn’t intended to be used, and also ticks a few other ‘beware’ boxes in HMRC’s Spotlight series, each LLP will fall in scope of the Managed Service Company (MSC) legislation.

The result? Each user could be landed with the around same level of debt as if they were caught by IR35!

MSC risk (cont.)

Interestingly, the definition of an MSC under Chapter 9, Part 2, Income Tax (Earnings and Pensions) Act 2003 is given as:

First condition: The company’s business must consist wholly or mainly of providing, directly or indirectly, services of an individual to third-party clients. 

Second condition: The individual (worker) supplying their services to the third party client receives payments from the service company equal to the greater part of the sums received by the service company from the client for the services provided by the worker. 

Third condition: The payments received by the worker are greater than they would have received if all of the payments were treated as employment income of the worker relating to an employment with the service company. 

The final THIRD FAIL is that, for HMRC to make a case under this legislation, there also needs to be the "involvement" of an MSC provider, or a business that specifically markets and/or provides a corporate solution and services to individuals who are providing their services to end-clients. A big giveaway with the LLP model - that it is well within scope -- is the terminology used in the marketing material; the claims of ‘HMRC approval,’ the 100% compliance rate claim, the tax efficiency claim, and also the fierce attacking of umbrellas and other (compliant) competitors.  

'LLP' scheme (like these) = 'Likely Long-term Problems' with HMRC

Where a scheme is luring people away from using a limited or umbrella company (or even from direct employment) to instead use an LLP to provide their services to end-clients, but generate a tax advantage, it is clear that this will incur three big fails in the eyes of my former employer, resulting in ‘Likely Long-term Problems’ with the Revenue for the scheme users of such ‘LLP’ models.