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Limited liability partnerships and IR35 - Disguised Employment

Before April this year members of Limited Liability Partnerships (“LLPs”) were effectively treated as self employed (Tax: s. 863 ITTOIA; and, for NICs s. 15 (3A) Social Security Contributions and Benefits Act 1992).


There’s nothing new about HMRC having statutory powers to deem PAYE (and NICs), for instance, PAYE/NICs Regulations cover agencies engaging individuals, IR35 for personal service companies, and from 2007 management service companies controlling limited companies using corporate structures that previously paid expenses and dividends and low salaries. Offshore intermediaries engaging UK employees is another new statutory area providing teeth to HMRC gums.

This article is about the use of anti IR35 structures that some “tax boutiques” promoted as strategies that used LLPs to circumnavigate employment to avoid PAYE and Class 1 NICs. To counter this, HMRC published a consultation document on 20 May 2013 with proposals to sort out disguising of the employer/employee relationship through membership of a LLP.

HMRC’s published view – the deeming of PAYE/NICs

Firstly, HMRC has just recently released its guidance to staff regarding special rules involving tax complexities involving various types of partnerships.

Secondly, regarding this article, members of LLPs used to be, by default, taxed as self-employed partners.

The 2014 Finance Bill contains provisions which will deem certain members ('salaried members') as employed by their LLP under a contract of service for tax purposes. The National Insurance Contributions Act 2014 provides a power to make associated changes to National Insurance legislation by way of Regulations.

Under that proposal legislation came into force from 6 April 2014. Broadly, HMRC regards a salaried member is deemed to be employed by their LLP for tax and NICs purposes. In these circumstances, the LLP will be liable to deduct and pay tax and NICs on any amount paid to the salaried member as if it were employment income for tax and employed earners’ earnings for NICs.

The LLP will be the secondary contributor for National Insurance purposes, and will be responsible for paying NICs on earnings and benefits and also for any Statutory Payments (such as statutory sick or maternity pay). In a way, this dovetails with my earlier article about LLPs - an employment law matter and the rights of limb workers.

In summary HMRC have introduced special anti-avoidance measures to ensure that individuals cannot enter into arrangements with the main purpose of avoiding the provisions of the new legislation. This will include situations when a worker provides their services to an LLP through an intermediary which is itself a member of that LLP. In these circumstances, the income of the intermediary from the LLP will be deemed to be the worker’s income for tax and NICs purposes. Payment will be regarded as being made to the worker at the point the LLP pays the intermediary for the worker’s services.

Consequential changes are also proposed to IR35 legislation which will prevent double taxation and avoid 2 separate secondary contributors being liable to pay NICs on the same earnings. Under these new provisions, where an amount is treated as the worker’s own remuneration:

  • an equivalent amount will not be included in the deemed employment payment calculation
  • there will be no further liability to pay tax and NICs if any of the amount paid by the LLP is subsequently paid as salary to the worker by their intermediary - the amount