The LLP salaried members rules – Are you compliant?

The salaried members rules treat members of LLPs (but not partnerships other than LLPs) as employees for tax purposes if in substance their relationship with the LLP is akin to that of an employee. Not only does this affect the amount of tax payable, but it is also necessary to operate PAYE which may be a significant administrative burden.
 
For further detail on the operation of the rules, please refer to our factsheet here.

Whilst many LLPs considered the impact of the rules at the time they were introduced, it is necessary to review these periodically to ensure continued compliance in light of the numerous pitfalls. The following are examples of common issues.
 
  • It is not uncommon for members to receive income based on the profitability of a specific department or cost centre, often because the performance of a specific department can most easily be attributed to the work of the member in question. Whilst the rules are primarily intended to counteract remuneration which is fixed, if amounts do not vary in line with the overall profits or losses of the LLP, they will still be affected by the rules. 
  • Since the time when a member first joined an LLP there may have been various changes to the management board and the internal operational infrastructure. If these changes mean that, in practice, the member no longer exerts significant influence over the affairs of the LLP, this poses the risk that the anti-avoidance rules might apply.  
  • Say, for example, a new member of an LLP will take a fixed annual salary of £100,000 but intends to contribute capital of £25,000 before joining the LLP to ensure that they do not fall foul of the salaried members rules. Due to difficulties in obtaining finance, the individual is only able to contribute the required capital 3 months after joining the LLP. Under the salaried members rules members are ordinarily given just 2 months to make such contributions, so clearly the rules must be reviewed carefully before any action is taken.
We would be happy to arrange a meeting to undertake a preliminary ‘health check’ to assess the current compliance of the LLP with the rules, and indeed to address any other concerns that you may have. Please contact your usual Moore Stephens adviser for further information.

 

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