Defining disguised employment as: a limited liability partnership (LLP) member who works for the LLP on terms that are tantamount to employment; Chancellor of the Exchequer George Osborne announced during Budget 2013 that the government was due to consult on a number of changes to the tax rules on partnerships, including the act of disguising employment relationships through LLPs.
These consultations, which took place between late May and early August 2013, resulted in the draft legislation Mr Osborne unveiled before parliament at the start of December last year as part of his Autumn Statement.
Ready to take effect from April this year, the government is set to “…legislate to prevent employment intermediaries from being able to use contrived contracts to disguise the employment of workers,” something which the government says will place tax rules more, “…in line with its core principles and objectives for fairness and flexibility.”
The Consultation Findings
The results of the government’s consultations acknowledged that there is overall acceptance that the government should legislate to prevent tax losses as a result of disguised employment statuses within LLPs, though it was noted that “some respondents stressed the importance of the partnership structure for businesses, particularly the use of LLPs which combine limited liability with the flexibility of partnerships.”
For this reason, a large number of respondents objected to HMRC using traditional employment status rules (as was originally proposed) to define an LLP member’s employment status, suggesting that the rules described in HMRC employment status manuals are inappropriate when it comes to determining the status of large professional LLP members.
The Government’s Proposals
Taking these collective views on board, the government has thus decided to drop use of HMRC’s traditional employment status rules in determining the employment status of an LLP member, instead opting to place a much greater focus on the level of economic risk the partner has within the LLP itself, specifically focusing on:
- Whether the member receives a fixed amount per annum (as per a salary), or their remuneration varies;
- The amount of any capital contribution they have put into the LLP, and;
- The specific level of control the member has over the partnership’s business.
Other conditions HMRC will seek to look into in order to determine disguised employment relationships through an LLP when the legislation comes into force in April 2014 is by looking into whether or not a partnership member:
- Has economic risk in the partnership, such as loss of capital or repayment of drawings, should the partnership make a loss or be would up;
- Is entitled to a share of the partnership’s profits, and;
- Is entitled to any surplus assets on a winding-up of the partnership.
Advice on Disguised Employment Relationships
To speak with a professional regarding how the employment relationships within your LLP may be affected by this new legislation, or for any other reason, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no-obligation meeting.
This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.