Not all LLP members are self-employed
It has been almost 10 years since HMRC declared that not every member of an LLP is automatically considered to be self-employed. As of April 2024, LLP members are to be classed as ‘salaried members’, and treated as employees for tax and payroll reporting purposes, where they meet the following three conditions:
Condition A considers the manner in which the individual is rewarded for his or her performance of services to the LLP. A salaried member will have a reward package that is largely that which an employee would have. This means they are being substantially remunerated through a fixed salary or a variable bonus on their performance, rather than a share of the profits of the overall business.
Condition B is where the member does not have a significant say in the running of the business as a whole; and
Condition C looks at the capital contribution made by the member to the LLP. The individual will be a salaried member if he or she has invested less than 25% of their expected income from the LLP as a capital contribution. This will need to be reviewed on an annual basis.
Larger LLPs, with specific management committees, can, almost by default, ensure that not all members will meet the three conditions above, as those non-committee members do not have a ‘significant say in the running of the business’. Recently, a case put before the Upper Tax Tribunal has examined the tax status of 82 members of an LLP and found that most of them should be taxed as employees not self-employed.
Where the member is to be taxed as an employee, PAYE and Class 1 National Insurance Contributions should be applied and the salary would be deductible in arriving at the LLP’s disputable profits – so being included in the LLP’s expenses on its income statement.
It is worth noting that a salaried member can also be classed as a ‘designated member’. However, it can be unclear exactly as to how much of a ‘significant say’ in the management of the LLP (see Condition B) a designated member has, with the additional responsibilities that being a designated member brings. Therefore, each case must be considered separately.
As always, should there be any uncertainty then we would recommend you talk to your accountants and business advisors. We can review the status of all LLP members to ensure they are taxed correctly.
For further information on LLP, please contact us on 023 8046 7498 or email Nick Whitemore.