Salaried members of LLPs – revised guidance

HMRC has issued a revised technical note on the proposals that were announced last December dealing with the tax treatment of salaried members of LLPs.

This was one of a number of proposals relating to the treatment of partnerships where legislation was published in draft in December for inclusion in the 2014 Finance Bill. The others concerned ‘mixed member’ partnerships (those with both individual and company members), alternative investment fund managers operating through partnership structures, and anti-avoidance rules dealing with the disposal of assets or income streams through partnerships.

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 the three conditions are all met. Please click here for what's new in the conditions.

The legislation also contains anti-avoidance provisions under which arrangements with a main purpose of circumventing the salaried member rules will be disregarded.

The revised note refers in particular to the use of non-recourse or circular loans to finance capital contributions.

This legislation will take effect from 6 April 2014. In view of the 13.8% NIC cost LLPs should review their position before then to consider whether any members will be caught by the new rules and whether any action can be taken to improve the position.

For further advice please speak to your usual contact at Moore Stephens.


Simon Baylis
Jacquelyn Kimber

Related links

Private client tax
Business tax