Contractors' Questions: Do all LLPs face tax over 'disguised employment'?

Contractor’s Question: Last month, the chancellor was predicted to continue the attack on Limited Liability Partnerships and since then, ContractorUK has reported that these proposals to stamp out ‘disguised employment’ by LLPs were ‘taken forward’ in the Autumn Statement. But when, precisely, do these measures take effect and would all LLPs be impacted, even if they don’t consider themselves to be employees?

Expert’s Answer: The draft Finance Bill 2014, published last month, does indeed intend to tackle perceived tax avoidance by some partners in LLPs. Assuming it is enacted in its current form then, from April 6th 2014, certain members of LLPs will lose their self-employment status -- in that they will be treated as employees for tax purposes.

Where a partner is treated as an employee, PAYE income tax will be levied in addition to both employers’ and employees’ National Insurance Contributions, which are steeper than for self-employed individuals.

But more positively, genuine LLP members should hopefully not be affected, thanks to the draft legislation being designed to tackle the more obvious cases of disguised employment. This is because three criteria are stipulated in the draft, each of which must be satisfied before someone can be deemed to be an employee for tax purposes.

Firstly, are the incomes of the partners wholly or substantially (80% or more) fixed and without any reference to the profit/loss of the LLP? Secondly, do the partners have a significant influence over the running of the partnership? Thirdly, are the funds that the partners have contributed to the LLP less than 25% of their incomes? To answer this final question, bear in mind that funds contributed can include both undrawn profits and capital introduced.

Remember, the bill is only draft and could still change before April 6th, but if you feel you may be at risk then you could explore altering your LLP arrangements.  

The expert was Jon Sutcliffe, partner at Top 20 accountancy firm Kingston Smith LLP.