In 2014, this advantageous tax situation was put to the test, and on 17 July 2014, the 2014 Finance Act received Royal approval and introduced new provisions into the Income Tax (Commercial and Other Income) Act 2005 (ITTOIA). The purpose of these new provisions was to ensure that certain individual members of an LLP would be treated as employees for tax purposes, thereby circumventing the ability of LLPs to avoid PAYEs, statutory payments such as statutory sick pay, maternity benefits, paternity and adoption benefits, and employer NICs. If, under ITTOIA, an individual member is to be taxed as an employee and not as a partner, he or she is referred to as an “employee member” of the LLP. If M is treated as an employee, the normal tax consequences apply to both M and LLP. M`s remuneration is treated as labour income. The LLP is an employer, must operate PAYEs and is responsible for the employer`s NICs; and is entitled to a deduction for the deemed earned income paid to M. The domino effect of related legislation, such as employment-related securities legislation and the benefits plan (although the latter has now incorporated an equivalent into the obscure compensation rules for the self-employed), is of particular concern. Termination may be an option for an LLP to ensure that the status applies in the future. The LLP may wish to dismiss the employee member entirely, i.e. both as an employee and as a member, before the single status is agreed.
For this purpose, the LLP must be dismissed in both relationships in accordance with the separate rules for employees and members, unless the existing contract expressly provides for an interdependent double termination of employment. For example, an existing contract may provide that if the salaried member is terminated as an employee, he or she will no longer be a member. This provision may be invalid if a decision is made as a member and not as an employee. Following the passage of the Employees Act in April 2014, individual partners in LLP run the risk of being considered employees. HMRC actively seeks additional taxes, penalties and interest from non-compliant LLPs. Although there is no legal basis, the practice of contributing capital to LLP. has become common to prove an associate`s financial exposure to the business and allay fears that partners are “veiled employees.” The aim was to show that profit allocations were, at least in part, a return on equity and not only for services rendered. Figures above £1,000 were often considered a minimum, but contributions increased as HMRC`s attention became more frequent. Once the status has been agreed, it may not be the end of the story.
It may be necessary to agree on the exact terms of the agreement. An employee member may have signed an employment contract, subordinate letter and/or membership contract. Some conditions may apply only to employees, while others may apply only to members, and some conditions may apply to both employees and members. This may lead to uncertainty as to the special conditions to which the parties are bound once the status is agreed. Since its launch in 2000, the limited liability company (LLP) has been successful. The number of LLRs increased year over year until the trend recently reversed – a reversal that coincides with changing rules for employees. It has been shown that not enough LRTs have taken proactive steps to verify and document their compliance with the new rules, particularly when businesses have grown rapidly or operating models have changed, further exposing them to challenges. As a best practice, LRPs should regularly reassess compliance, but there are a number of trigger points to monitor. The California State Bar`s Limited Liability Partnership (LLP) program certifies professional partnerships so that partners can limit vicarious liability for the actions of their partners and employees under the state bar articles and limited liability company rules and regulations.