Routinely used by financial advisory firms since their introduction in the UK in 2001, limited liability partnerships (LLPs) combine the flexible structure of a partnership with the benefits for its members of limited liability.
There are also tax and cashflow advantages. There has been a presumption for tax purposes that LLP members (often referred to as partners) are self-employed, which attracts National Insurance contributions (NICs) at a fraction of the rates paid for employees. However, as part of its clampdown on ‘disguised salaries’, HMRC introduced new rules to reverse this in April 2014.
This was quickly followed by a Supreme Court decision on the status of an LLP member. It held that a junior equity partner of a law firm was a ‘worker’. The claim concerned whistleblower protection, but has much wider implications, affording much greater rights to LLP members.
From 6 April, if certain conditions are met, a partner is treated as employed by the LLP for tax purposes. PAYE and income tax on benefits will arise, but the additional cost of employer NICs, payable at 13.8 per cent of remuneration, is the key concern.
The rules on disguised salaries also apply to a member performing services for the LLP through a personal service company that is a member of the LLP (and corporate members could be prohibited, anyway, following the Department for Business Innovation and Skills’ imminent consultation).
Confusion
There is a lack of clarity in certain areas, such as what amounts to a “significant influence” over the affairs of the LLP. For many members of large LLPs, it is unlikely that they could be said to have such an influence. HMRC is, however, likely to accept that FCA-approved members holding CF3 (chief executive) and CF8 (apportionment and oversight) status
do have significant influence, although not necessarily those holding CF4 (partner) status.
The short timeframe between the publication of the draft legislation and the changes taking effect meant that many LLPs did not have the opportunity to adequately review or reorganise their management structures or voting rights, and/or reconfigure their remuneration structures to fall outside disguised salary rules 1 and 2 (see box), and were forced to require their partners to increase their capital contributions (which cannot include tax reserves or loans repayable before the member leaves).
As the dust settles, many firms are now re-evaluating or changing their arrangements and the extent to which their members do or could have significant influence over the affairs of partnership, and/or the extent to which their remuneration can be said to be affected by the overall amount of the LLP’s profits or losses.
Partnership deeds also need to be amended to reflect the fact that the conditions are tested at the start of each tax year, when an individual first becomes a partner and whenever there is a change in circumstances affecting the condition.
According to HMRC, the tax treatment of members should not affect their employment status, but it may be unrealistic not to expect some ‘creep’ to occur and the recent Supreme Court ruling that an LLP member was a worker has already moved the goalposts.
The case concerned allegations that the claimant, a former member of law firm Clyde and Co LLP, had been discriminated against because of her sex and subjected to detrimental treatment (including expulsion from the firm) because she had made “protected disclosures” – or blown the whistle – about alleged money laundering and bribery by a Tanzanian firm to which she had been seconded.
Although partners can already bring discrimination claims in the UK, she needed to establish that she was a ‘worker’ in order to pursue her whistleblowing claim. ‘Workers’ have an intermediate status between employees (who enjoy many statutory rights, including the right to claim unfair dismissal) and the self-employed (who have far fewer statutory rights). Workers are not as tightly protected as employees, but still have valuable rights. In addition to whistleblowing protection, they have part-time workers’ rights and the rights to paid annual leave, not to suffer unlawful deductions from their pay, to be paid the minimum wage, and to be accompanied at disciplinary and grievance meetings.
Workers
In order to be a ‘worker’, an individual must be on a contract (written or oral) that requires them to provide services personally, in circumstances where the other party is not their client or customer. The Supreme Court determined that the claimant satisfied that test: the LLP was in no sense her client or customer; she could not market her services to any other party; and she was integral to its business. This means that she can pursue her whistleblowing claim. Worryingly for old-style partnerships, the court left open the question of whether partners in such a partnership could also be ‘workers’.
The case has significant implications for those IFA businesses set up as LLPs. Operating in a highly regulated sphere and with highly paid senior staff who can afford to instruct lawyers, financial services businesses are particularly vulnerable to a whistleblowing complaint. An individual in dispute with a firm may well be able to find an instance of raising a regulatory issue (even if only in passing) and rely on this as being a ‘protected disclosure’. To succeed with a claim, he would need to establish that he reasonably believed the disclosure was in the public interest and then show a causal link between the disclosure and any detrimental treatment by the firm. Some LLP members will use the whistleblowing legislation strategically to seek to negotiate favourable exit terms, as compensation for such a claim is potentially unlimited.
As well as the merits of a claim and its obligations to regulators, a firm faced with such a claim will need to consider the possible impact on its reputation, its investors, the time spent in defending a claim and the (usually unrecoverable) cost of defending an employment tribunal claim.
Whistleblowing
In order to manage these risks, IFAs should ensure that they have a whistleblowing policy and procedure in place that is clear to its staff, and that this is applied to all employees, including LLP members, to ensure that such concerns are properly investigated and addressed when raised. Firms wishing to expel LLP members will also need to be alive to the risk of whistleblowing claims. If there is any risk of a whistleblowing claim (or a discrimination claim), they should ensure that the reasons for any business decisions, including with respect to the level of bonuses/discretionary profit share and expulsion or compulsory retirement, are properly documented and do not imply any link between the member having raised regulatory issues or other breaches of legal obligations and their profit share or expulsion.
Firms will also need to consider the wider implications of their members having ‘worker’ status, such as the need to ensure that they receive paid holiday, to give their express agreement to offset monies owing to the LLP or to claw back any share of profits,
part-time members’ rights, permitting members to be accompanied at any hearing regarding any conduct issue or any complaint/grievance and, potentially, pension auto-enrolment.
The commercial drivers and potential tax savings mean that many businesses will continue to benefit from operating as an LLP rather than a limited company or a partnership. LLPs need to tread more carefully to ensure that those benefits are realised.
Jane Amphlett is a partner in the employment team at City law firm HowardKennedyFsi LLP advising financial services organisations
Disguised salary rules for LLPs
1. 80 per cent or more of the member’s remuneration is fixed (including in the initial or final years) or, if variable, without reference to or in practice unaffected by the overall LLP profits (rather than just, for example, by reference to the profits of the member’s division or team).
2. The member has no significant influence over the affairs of the LLP.
3. The member’s contribution to the partnership is less than 25 per cent of the disguised salary.
Key points
* As part of its clampdown on ‘disguised salaries’, HMRC introduced new rules in April 2014 to reverse the presumption that for tax purposes LLP members are self-employed.
* Many LLPs were forced to require their partners to increase their capital contributions.
* IFAs should ensure that they have a whistleblowing policy and procedure in place that is clear to its staff, and that this is applied to all employees.
