This is the burning question for every LLP right now, with new tax legislation due to come into force on April 6th 2014.
It is designed to prevent what HMRC views as tax avoidance - where LLPs avoid PAYE and NICs by designating workers as members, rather than as salaried employees.
Despite their imminent introduction, the rules are still ‘broad brush’ and open to interpretation, although they are a clear statement of intent on the part of the HMRC.
Many LLPs are likely to be affected and all should carry out a thorough risk assessment as a matter of urgency.
What are the ‘danger’ signs?
Deciding whether an individual is ‘salaried’ depends on a complex set of circumstances, but if they satisfy the following criteria the answer may well be “yes’.
“80% or more of their profit share is fixed”
If an individual can count on a fixed payment each month, regardless of the LLP’s performance, that is over 80% of total remuneration, then they may be classed as salaried.
“They don’t have significant influence over the LLPs affairs”
This is a grey area. It is unlikely they will have to be a voting member, but they will have to demonstrate influence, for example as a senior manager, technical expert or key advisor.
“Their capital contribution is less than 25% of their fixed income”
Some firms have allowed members to pay a very low nominal sum for their ‘share’, while guaranteeing a high, fixed monthly payment. This will be a “salaried’ indicator under the new legislation.
What should you do next?
The new rules come into force on April 6th 2014, so you should review your remuneration arrangements urgently and take specialist advice if required.
You should also put new PAYE arrangements in place for any individuals affected by the legislation to avoid any future doubt over disclosure.
HMRC is issuing new guidance regularly. Please contact us if you would like to discuss your own or your LLP’s situation.
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