Self-Employment rules change for LLPs?

The Government is cracking down on situations in which workers are treated as self-employed for tax purposes and pay low amounts of NICs but appear to act as employees.

This has led to a consultation to remove Limited Liability Partners (LLPs) from self-employment to salaried employees. HMRC is considering the responses received with a view to introducing new rules from April 2014.

At the moment members of an LLP are taxed as self-employed partners even if they receive a regular “salary”. This is the default position of the law and nothing is being “fiddled”, however, HMRC believe this rule is being abused.

A person who is self-employed is generally taxed more favourably than an employee and HMRC is concerned that LLPs are being used to exploit the tax advantages of self-employment even though they are employees in most respects. Therefore HMRC plans to remove the presumption that all members of an LLP should be taxed as self- employed partners, instead a member who meets the test for a “salaried member” will be taxed as an employee and subject to income tax and Class 1 NIC.

A salaried member is someone who meets one of the following conditions:

  • They are an individual member of the LLP who if the LLP carried on as a partnership by two of more of its members, would be regarded as an employee of the partnership. The normal test of employment and self-employment would apply.
  • They are an individual member of the LLP who does not meet the first condition but who (a) has no economic risk if the LLP makes a loss or is wound up; (b) is not entitled to a share of the profits; (c) is not entitled to a share of any surplus assets on a winding up.

Members who do not meet either condition would continue to be taxed as self-employed partners.

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