Member and employee of an LLP?
The case background
In Wilson v HMRC [2020] TC07716 (see Follow up ), the taxpayer (W) maintained that he was actually an employee at the relevant times in two tax years, and so should be taxed as such, i.e. subject to Class 1 NI, for which the limited liability partnership (LLP) would be responsible for deducting and paying. HMRC argued that W was self-employed, and therefore personally responsible for any Class 2 and Class 4 NI due.
W had joined the LLP in 2011 and entered into the LLP agreement. He was not entitled to an above the line salary. Instead, W’s profit share comprised a first charge of £180,000, subject to adjustments. If the LLP made an overall loss, W was not entitled to any payment under his first charge. In his 2011/12 tax return W claimed deductions of £9,562 against his share of partnership profit. He understood that the costs would not have been deductible from employment income. W did not have a written contract of employment for his engagement with the LLP.
The LLP paid the income tax and NI due on W’s payments as a self-employed earner/member of an LLP to HMRC for the tax year 2011/12, as well as payments on account for 2012/13. At the time of appeal, W was in dispute with the LLP as to who had liability to pay the tax due on payments made to him.
Employment status?
An individual’s employment status under employment law does not always correspond to that person’s employment status for tax purposes - the IR35 legislation being a prime example of this. For W’s appeal to succeed, he needed to show that he could have been an employee of the LLP for tax purposes despite being a member of the LLP, and that the payments made to him were in relation to employment, rather than in relation to his membership.
Pro advice. The First-tier Tribunal (FTT) also made it clear that, although it was Haines Watts who had paid income tax and NI to HMRC, this had no bearing on the question of whether the underlying payments were taxable as self-employed earnings as a member of an LLP or not.
The FTT dismissed W’s appeal, concluding that the wording of the Limited Liability Partnerships Act 2000 does not permit a person to be treated as an employee for tax purposes when a member of an English LLP, and even if it did, the relevant payments did not have the hallmarks of employment income. However, this case concerned tax years before the introduction of key anti-avoidance rules.
Salaried members
Since Finance Act 2014 , the salaried members rules (see Follow up ) remove ambiguity as to whether a member of an LLP is a true partner in partnership or simply a disguised employee.
Pro advice. The rules should be applied to each member of the LLP.
Where the salaried member rules apply, the member of the LLP is treated as an employee for tax purposes, meaning the LLP must factor in PAYE and Class 1 NI on payments.
Pro advice. An LLP member must meet all three conditions to be a deemed employee.
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