Lawyers that are part of an LLP must ensure they met certain criteria to not be deemed an employee
LLP Members: Employees or Self-Employed? Tax Implications Highlighted in 2024 Case
The Labour Party and HMRC are on the hunt for more Treasury funds and if you are a lawyer, architect or member of a Limited Liability Partnership you could be fined for unpaid tax if you are deemed a salaried employee and not self-employed. We highlight the conditions that could put you in the firing line.
The tax status of Limited Liability Partnership (LLP) members has been under scrutiny under the Salaried Members Rules (SORP) since 2014. A 2024 case before the Upper Tax Tribunal emphasised the need for careful consideration. In this case, most 82 LLP members were determined to be employees for tax purposes, rather than self-employed.
Who could be affected?
- Accountants and Auditors: As gatekeepers of financial information, accountants and auditors will be at the forefront of implementing the new SORP. Self-employed practitioners will need to ensure their own practices are compliant and they are equipped to guide their LLP clients through the changes.
- Lawyers: Law firms frequently operate as LLPs, and the revised SORP will necessitate adjustments to their financial reporting processes. Self-employed lawyers will need to understand the new requirements and ensure their practices are in line with the updated standards.
- Architects and Engineers: Many architectural and engineering firms use LLP structures. Self-employed professionals in these fields will need to adapt their accounting practices to align with the revised SORP, ensuring transparency and accuracy in their financial reporting.
Consultants: Consulting firms across various industries often adopt LLP structures. Self-employed consultants will need to navigate the complexities of the new SORP and ensure their financial reporting adheres to the updated guidelines
Do you fall into these conditions?
LLP members are classified as “salaried members” and taxed as employees if they meet three specific conditions, according to Saint, the chartered accountancy:
- Condition A: Their remuneration structure resembles that of an employee, with a focus on a fixed salary or performance-based bonus, rather than a profit share
- Condition B: They lack significant influence in the overall management and decision-making of the business
- Condition C: Their capital contribution to the LLP is less than 25% of their anticipated income from the LLP. This condition needs annual review
Management Structure and Condition B
The management structure prevalent in many larger LLPs often triggers Condition B. In these organisations, strategic and operational decisions are typically made by a small Executive Committee. As a result, most members might be considered employees if they also satisfy Conditions A and C.
Tax Implications
The distinction between employee and self-employed status has significant tax implications. When an LLP member is classified as an employee:
- PAYE (Pay As You Earn) and Class 1 National Insurance Contributions apply
- The salary is deductible when calculating the LLP’s profit
Expert Review Recommended
Given the complexities and potential financial implications, it is crucial for LLPs to have the status of their members reviewed by experts. This ensures correct tax treatment for all members and helps avoid potential penalties or disputes with tax authorities.
Latest case serves as a reminder
The recent case serves as a reminder that LLP members are not automatically self-employed for tax purposes. The three conditions outlined above must be carefully assessed to determine the correct classification.
