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Budget tax threat to LLPs

LLP members could lose presumption of self-employment

20 March 2013

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The government has announced plans to “remove the presumption of self-employment” enjoyed by LLP members, regardless of status.

Chancellor George Osborne’s budget report states, in section 1.209, that the measure is needed to “tackle the disguising of employment relationships through LLPs”.

The report says that further measures will be considered to “counter the artificial allocation of profits to partners” in both LLPs and traditional partnerships.

Louis Baker, head of professional practices at accountants Crowe Clark Whitehill, said that big LLPs could lose huge amounts of money in employers’ national insurance contributions if members were treated as employed.

“At an individual level it might not make a lot of difference whether you are taxed as a partner or as an employee,” Baker said.

“The rates of income tax are the same and national insurance is not that different. The absolute key to this is that self-employed partners do not have employer’s NI charged on their profit shares.

“If instead these shares are treated as a salary for employees, the business will have to pay 13.8 per cent national insurance contributions.”

Baker said that under the LLP tax legislation, introduced in 2002, all members are taxed as self-employed, even if they had previously been salaried partners.

Level playing field

He said that, if the government went through with the change, LLPs would have to operate on a “level playing field” with conventional partnerships where the tax status of junior partners was unclear.

“All LLPs where members enjoy different rights will need to review the status of their junior members over the next year,” he warned.

Baker said the new rules could be introduced as early as spring 2014. “You can see where they’re looking to go,” he added.

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