Simon Littlejohns, Partner and Head of Tax at Chartered Accountants Friend Partnership Limited, with offices in Birmingham and London, offers a briefing of the conditions of LLPS and salaried partners.
5 July deadline for Capital Contributions
From April 2014, as brought in by Finance Bill 2014, new provisions apply to limited liability partnerships (“LLPs”). Members of LLPs who comply with the three conditions specified below, will be treated as employees for tax with the consequence that PAYE and Class 1 National Insurance will be due on their pay and they may have taxable benefits-in-kind.
This is met where it is reasonable to expect that at least 80% of the total amount payable by the LLP for the member’s services in his or her capacity as a member of the LLP will be ‘disguised salary’.
This is met if the mutual rights and duties of the member and the LLP do not give the member significant influence over the LLP’s affairs.
This is met if the member’s contribution to the LLP is less than 25% of the disguised salary which, it is reasonable to expect, will be payable in the tax year for the services the member performs for the LLP.
Condition 3 is the ‘easiest’ to break and the member may need to make an injection of capital into the LLP to bring their contribution up to 25% or more of the disguised salary. The condition will be treated as broken for 2014/15 if the member gave an undertaking prior to 6 April 2014 that the capital would be introduced and it is actually introduced by 5 July 2014.
The 5 July deadline is rapidly approaching and LLPs must make sure that members actually introduce the capital in line with their commitments. If it is not introduced on time the member will be treated as an employee from 6 April 2014.
If a member joins the LLP after 5 April 2014
There are similar rules for those who join an LLP after 5 April 2014. On the day they become a member of the LLP they must make a firm commitment to contribute an appropriate amount of capital; which must be made within two months of their admission.