Updates on the tax treatment of LLPs

One of LWA’s specialist services includes tax and accounting expertise for firms that are set up as Limited Liability Partnerships. In this blog by our Tax Manager, Nickie Antley-Slater, we look at the tax treatment of LLP members, as well as HMRC’s recent identification of a tax avoidance scheme in use by property landlords.

Not all LLP members are self-employed

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 has 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 3 conditions are present:

  • Condition A considers the manner in which 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.


HMRC challenges LLP scheme for property businesses

HMRC have recently published Spotlight 63 which alerts taxpayers to a marketed tax avoidance scheme that claims to help taxpayers reduce the tax payable on their property rental profits.

The HMRC view is that the “hybrid” structure involving an LLP with individual and corporate members does not have the tax savings that the scheme promoters claim.

The scheme claims to enable buy to let landlords to transfer properties to the structure without paying capital gains tax (CGT) or stamp duty land tax (SDLT) and, once established, obtain a bigger deduction for their mortgage interest payments than they would have obtained if the property had remained in individual ownership. 

It is also claimed that the “hybrid” structure saves inheritance tax when the property is passed on, which is incorrect as there is no IHT business relief for property investment businesses. 

Please take care if you are tempted to use a scheme that claims to save tax; talk to us first.


Utilise our expertise

LWA have a team of experts specifically trained and experienced in supporting Regulated Firms including LLPs with bespoke tax and accounting rules. If you would like to find out more call us on 0161 905 1801 in South Manchester or on 01925 830 830 in our Warrington office. Alternatively email mail@lwaltd.com with ‘LLP expertise’ as the subject.