Rise in HMRC enquiries into LLPs with salaried and mixed members

The Finance Act 2014 introduced a number of anti-avoidance measures targeted at the taxation of partnerships.

These measures covered, amongst others:
  • the tax treatment of salaried members of LLPs;
  • mixed member partnerships (those with both individual and company members).

We have recently seen an increase in HMRC checking that LLPs have considered these rules and more importantly, applied them in practice where necessary.

At the time that the rules were released there was a lot of activity in this sector with LLPs looking at their operations to determine whether or not these rules applied. However, it is important to note that these rules are still relevant and should be constantly monitored.

What are the salaried member rules?
The salaried members rules affect individual members of LLPs who work for the LLP on terms that are equivalent to employment.

There are a number of conditions which help LLPs determine whether or not these rules will apply. If all of the conditions are met, the member will be treated as an employee of the LLP for income tax and NIC purposes. In such cases, PAYE must be operated in respect of these members and a higher overall amount of tax is likely to be due.

What are the mixed member rules?
These rules are relevant to LLPs that operate with both individual and corporate members.

The anti-avoidance rules target:
  • a corporate member who is allocated profits which are deemed to represent profit of an individual member; or
  • situations where a corporate member’s profit exceeds the ‘appropriate notional profit’ and an individual member has the power to enjoy some or all of these profits.  

If the relevant conditions are met then the anti-avoidance rules have the power to adjust the profit shares of an LLP. Such an adjustment could potentially see the profit share of an individual member increased so that they are taxed on profits that would have been allocated to them if there was no corporate member in place. 

How we can help
If you operate through an LLP and it has been some time since you have considered the rules in detail then now is a good time to refresh or to put advice in place to protect your firm should HMRC enquire.  

Our dedicated Financial Services Tax team provides advice to investment managers, hedge funds, and private equity business, many of whom operate through LLP structures.

We can advise on your statutory requirements and the most efficient ways of fulfilling these obligations, as well as advising on the most tax-efficient ways to structure your business and ensure that all available reliefs are utilised.

For more information on the tax services we provide, or to discuss how your business might be affected by the issues raised above please contact us.

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