The government is set to introduce new measures that could alter the taxation of Limited Liability Partnership (LLP) members.
Currently, one of the advantages for businesses choosing an LLP structure is that each individual member is treated as self employed rather than given employee status.
This places them in a more favourable tax band from the business’s perspective, as neither the member nor the LLP needs to make any National Insurance contributions from their profit share.
Many businesses have been legally operating under this system since the Limited Liability Partnership Act was passed in 2000, but now the government wants to change the status of members to prevent potential tax avoidance.
Members must complete partnership test
From 6 April 2014, members will be converted to Salaried Member status if they cannot pass the three conditions designed to judge the extent to which their role matches that of a partner in a general partnership.
The first condition involves their income and sets out that a Salaried Member will have a reward package that is largely that which an employee would have. For example, this means they are remunerated through a fixed salary or variable bonus based on performance, rather than a share of profits.
The second condition looks at whether an individual has a significant say in the running of the business. If they do not, this denotes Salaried Membership.
Finally, the third condition assesses capital contributions, if any, made to the LLP by the individual. A member will not be a Salaried Member if they have invested a significant amount of money in the LLP; that is at least 25% of their expected income from the LLP.
If none of these apply, it is the government’s view that the member’s role is more akin to that of an employee than a partner, and their National Insurance contributions will be increased accordingly.
LLPs under pressure to meet deadline
With the new taxation rules set to be introduced in three months, a fast turnaround is required for LLPs that currently operate under many members. They must decide whether to accept the new tax system or alter the structure of their partnership.
Once one of the main advantages of choosing an LLP structure is removed, it is also likely to affect the decision-making process of future partnerships, perhaps pushing them towards a more traditional partnership structure.
If you need advice on how the government’s changes could affect your business partnership, call Ralli Partnership Law Solicitors today on 0161 832 6131 and our team will be happy to answer your questions.