LLPs and taxation of "disguised employment" – no delay to implementation

February.27.2014

​Is your business operating in the UK in “Limited Liability Partnership” (“LLP”) form? If so, it may be affected by a tax reform from 6th April 2014, requiring immediate compliance steps.

HMRC revealed detailed proposals to reform the taxation of individual LLP members in December, targeting what they consider to be “disguised employment” which they believe has been taking LLP members who are in reality employees out of the Pay As You Earn (PAYE) payroll tax deduction system and the employment-related National Insurance Contributions (NICs) system. (See our earlier update for the detail).

The market responded to the proposals with concern and anxiety, due to their scope, complexity, and the level of uncertainty that seemed to have been created. Following a further robust informal consultation process, HMRC has now published revised guidance on the proposals, but any hopes for a deferral of the implementation date have been dashed. The remuneration of LLP members caught by the new rules will have to be subjected to the PAYE and employment-related National Insurance Contributions (NICs) systems from 6th April as originally planned. This gives affected LLPs just over one month to prepare. Any LLP failing to make this adjustment for affected members on time will face interest and penalties for non-compliance, and potential difficulties recovering sums paid to members.

Disappointingly, the substance of the rules proposed in December has not been altered. However, LLPs planning to take potentially affected individual members out of the new rules by requiring an increased capital contribution from them will now be give more time to arrange the required finance. Provided capital is unconditionally committed by 6th April there will now be a three month grace period from that date within which the capital must be actually paid in to the LLP.

If you are in any doubt as to the impact of this reform on an LLP’s UK tax affairs then your usual Orrick tax team contact is available to assist.