The corporate/LLP partnership structure has become popular within the insurance broking community to enable the business to be run as a partnership, yet delivering flexibility in balancing ownership with certainty of reward for key producers.
Typically the LLP is either the single trading entity or key personnel are partners in the LLP which owns and provides services to the broking company.
HMRC’s revised proposals, announced on 25 February 2014 to take effect from 6 April 2014, will impact individual members of LLPs who work for it on terms that are equivalent to employment.The issue being addressed
The ‘salaried members’ proposals are aimed at individual members of LLPs who work for the LLP on terms that are equivalent to employment. They do not affect partnerships other than LLPs.
At present a member of an LLP is automatically treated as being a self-employed partner, rather than an employee of the LLP, for the purposes of income tax and national insurance contributions (NIC). Rather than have tax deducted at source through the PAYE system, the individual is liable to income tax through his or her self-assessment tax return on his or her share of the LLP’s profits. This automatic self-employed status means that the LLP is not liable to pay any employer’s NIC (currently at a rate of 13.8%) and the individual is liable to the marginally lower rates of Class 2 and Class 4 NIC, rather than Class 1 NIC.
The changes will mean that a ‘salaried member’ will now be treated as an employee of the LLP for income tax and NIC purposes.The three conditions
The new rules will apply to any members of an LLP where all three of the following conditions are met:
- where there are arrangements in place under which the member is to perform services for the LLP in his or her capacity as a member, and it would be reasonable to expect that the amounts payable by the LLP in respect of the performance of those services will be wholly, or substantially wholly, unaffected by the overall profits or losses of the LLP (‘disguised salary’).
- where the mutual rights and duties subsisting between the members, and between the LLP itself and its members, do not give the member in question significant influence over the affairs of the LLP.
- where a member’s capital contributed to the LLP is less than 25% of the disguised salary which it is reasonable to expect will be payable to the member in the tax year concerned.
For further information please get in contact.NBSmaller broker LLPs may be able to demonstrate that each partner has significant influence over the affairs of the LLP. However, this is likely to be a greater challenge for members of larger LLPs who may need to address one of the other two conditions to continue being treated as a self-employed partner.