Decoding Tax Status: The Shift in LLP Members’ Employment Classification

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Andrew McQueen

Decoding Tax Status: The Shift in LLP Members’ Employment Classification


Since April 2014 members of an LLP are no longer automatically treated as self-employed for tax purposes.  A recent case before the Upper Tax Tribunal examined the tax status of 82 members of an LLP and found that most of them should be taxed as employees not self-employed.

LLP members are treated as salaried members and taxed as employees where three conditions are present:

Condition A considers the way the individual is rewarded for his or her performance of services to the LLP. A salaried member will have a reward package that is largely that which an employee would have. This means they are being substantially remunerated through a fixed salary or a variable bonus based on their performance, rather than a share of the profits of the overall business.

Condition B is where the Member does not have a significant say in the running of the business as a whole; and

Condition C looks at the capital contribution made by the member to the LLP. The individual will be a Salaried Member if he or she has invested less than 25% of their expected income from the LLP as a capital contribution. This will need to be reviewed on an annual basis.

The management structure of many larger LLPs will trigger Condition B, as the major strategic and operating decisions are taken by an Executive Committee of members. This means that most members would be treated as employees where Conditions A and C are also present.

If you operate as an LLP, we can review the status of the various members to ensure that they are taxed correctly. Where the member is taxed as an employee, PAYE and Class 1 National Insurance Contributions should be applied and the salary would be deductible in arriving at the LLP profit.