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12 December 2013

Stop Press: LLPs hit hard with new rules

Gorgeous George hits LLPs hard with new rules for determining whether members should be treated as employees rather than self-employed

In an unwelcome move, HMRC has hit LLPs with new rules destined to remove self-employed status from a host of members whose earnings are predominantly fixed, who have little say in the running of the LLP and don't contribute much capital. 

Draft legislation contained in the Finance Bill 2014 will change the status of an existing self-employed member to that of "salaried member" if each of the following three conditions are met:

Condition A

at least 80% of their remuneration is fixed or, if variable, the variable element does not relate to the profits of the firm as a whole. The total of their remuneration that is not a share of the variable profit of the firm is their ‘disguised salary’ (see C below);

Condition B

The individual member does not directly have significant influence over the affairs of the LLP;

Condition C

The individual’s capital is less than 25% of their annual ‘disguised salary’ (see A above).

The first two conditions are likely to cause quite a lot headaches for LLPs as junior members remuneration is often fixed, or only a small proportion is variable, and most members (including those working in large LLPs) do not have significant influence over the running of the LLP. 

The third condition is the one that it is likely to be much easier to fail IF members contribute capital.  However, many LLPs don't currently require contributions from their more junior members and as members must fail all three conditions before they are considered "salaried members" most LLPs won't have to worry about failure on this count. 

How does this affect your business?

If you have junior members who meet all the above criteria, they will all be treated as employees for income tax purposes and the employee will pay class 1 NICs (which are higher than class 2 and class 4 NICs for the self-employed) from 6 April 2-14, when the new rules come into effect.  Similarly, the employer will pay class 1 NICs on the member's remuneration.  This could be costly.

What you should do?

Review your LLP Agreement and assess ways in which you can alter the terms under which junior members are remunerated, have a say in the firm or contribute capital to ensure they fail one or more of the above conditions. 

As stated earlier, the capital condition is the one that is likely to be the easiest condition to fail but beware, there are detailed provisions in the legislation that need to be checked and the draft legalisation also says that measures designed to circumvent the rules will be ignored.

Legal assistance

If you need advice regarding your LLP Agreements or employment contracts, contact a member of our employment law team today on 01753 278659 or email your enquiry to

Stay in touch

Phone: +44 (0) 1753 889995


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