What LLPs must know about new HMRC rules

One of the drivers has been the tax and cashflow advantages, with a presumption for tax purposes that LLP members are self-employed.

Rules introduced by HMRC in April 2014 reversed that presumption, potentially increasing the cost of engaging LLP members substantially. Shortly afterwards, the courts held that LLP members could also be ‘workers’, giving them far greater employment-style rights.

From April 6 2014, if certain conditions are met, a partner in an LLP is treated as employed for tax purposes: this gives rise to PAYE and income tax liabilities and the additional cost of employer national insurance contributions on remuneration. Most investment firms are relatively small, which may mean their members do have significant influence, although each individual’s position will depend upon the precise arrangements in place.

Some firms are reviewing their remuneration practices and others increasing the level of control enjoyed by members. With a requirement to ensure that the test for self-employed status is met annually, LLP deeds need updating to reflect these changes and set out that the conditions are tested at the start of each tax year, when an individual is first made up as a partner, and whenever circumstances change such that they do or do not pass the relevant condition.

HMRC stated that the tax treatment of members should not affect their employment status, but this gives little comfort to LLPs following a recent Supreme Court ruling that an LLP member was a worker. This has resulted in a shake-up of practices and procedures within LLPs.

The claim has been settled on a confidential basis but it leaves in its wake a raft of issues. In terms of potential whistleblowing claims alone, LLP members could complain about ‘detrimental’ treatment, ranging from reductions in profit share to expulsion. In a highly regulated industry, with no cap on the compensation that can be awarded for a whistleblowing claim and with the sums involved in decisions over profit share and expulsion, LLP members are increasingly alert to the potential leverage such a claim may give them.

Add to this the cost and time involved in defending a claim, the potential reputational impact and a referral to the regulator, and these claims are often high stakes.

Firms need to have policies in place to encourage whistleblowing concerns to be raised promptly, confidentially and through appropriate channels.

Other rights for workers include an entitlement to the minimum wage, to take paid holiday and to be accompanied at disciplinary meetings. They are eligible for pension auto-enrolment and are protected against unlawful deduction of their wages.

LLPs need to make sure that their documentation and practices reflect these rights. A requirement for clear clawback provisions is essential, enabling them to meet their regulatory obligations without breaching members’ worker rights in respect of unlawful deduction protection.

LLPs remain attractive vehicles. But investment advisory firms need to be mindful of the greater risks involved in operating an LLP and take steps to protect themselves.

Jane Amphlett is a partner in the employment team at law firm HowardKennedyFsi LLP

LLP changes: Defining ‘employed’

The conditions on ‘disguised salaries’ – all of which must apply to trigger employee tax treatment in LLP partners – are:

80 per cent or more of the partner’s total remuneration is fixed or, if variable, is varied without reference to the LLP’s overall profit or loss; and

The partner has no significant influence over the affairs of the LLP; and

The partner’s contribution to the partnership is less than 25 per cent of its annual remuneration

Case study: The whistleblower hearing

In the Supreme Court ruling, a junior equity member of the law firm Clyde & Co LLP argued that she had been discriminated against because of her sex and had suffered various detriments, including her expulsion from the firm, because she had made ‘protected disclosures’ – that is, blown the whistle – about alleged bribery by a Tanzanian firm to which she had been seconded.

Partners are expressly covered by discrimination law, but she needed to show she was a worker in order to pursue her whistleblowing claim.

To do so, she needed to demonstrate that she was working under a contract (not necessarily in writing), that she was required to perform services personally and that the other party was not her client or customer.

The court held that the junior member satisfied these tests.