Will you auto-enrol your members?

It seems odd that a limited liability partnership (LLP) might have to contribute to pension arrangements for its members. However, the recent case of Clyde & Co v Bates van Winkelhof means we do need to consider this possibility.

Although pensions
auto-enrolment is aimed at establishing pension funds for lower paid individuals, it applies to all relevant workers unless the worker chooses to opt
out of the regime.

The first issue to consider is whether the partners of a firm are ‘workers’ even though they are also owners. This is where Clyde & Co has its impact.
The Supreme Court held that
a member of an LLP could also
be a worker. The case related specifically to a UK LLP and
does not apply to general partnerships.

It is possible for a member
of an LLP to simply be an investor who does not work professionally in the firm (either on client matters or in the management of the firm).

However, leaving such instances aside, it is likely that most professional firms constituted as a UK LLP will conclude that their members are ‘workers’ who, in auto-enrolment speak, will be an ‘entitled worker’ at the minimum.

This is important because
LLPs will have to do something with regard to its entitled
workers under the auto-enrolment process, even if it concludes it does not have to make pension contributions.

The next step is to ascertain
the firm’s ‘staging date’ from
when it needs to apply the auto-enrolment regime. The staging date is dependent on
the number of employees on
the entity’s PAYE payroll as of
April 2012.

Entities with a payroll of 60
staff in April 2012 will have their ‘staging’ date on 1 October 2014, with smaller firms going through the process over the next couple of years.

Those firms who had no
payroll in April 2012 will have a default staging date of 1 April 2017. This will include LLPs who employed all their staff through a service company in April 2012.

At its staging date, a firm
needs to categorise its working members (and all other workers) into three categories:

• Non eligible jobholder: LLP members and workers who earn qualifying earnings which are less than the earnings trigger for auto-enrolment (£10,000 a year for the 2014/15 tax year), or who earn more than the earnings trigger but are under 22 years of age or over the state pension age.
• Eligible jobholder: LLP member/worker with qualifying earnings in excess of the threshold of £10,000.
• Entitled workers: LLP member/worker with no relevant earnings or earnings below £5,772.

The firm will need to make pension contributions, at the firm’s expense, to qualifying pension arrangements for all eligible jobholders. The contribution is 1 per cent of the qualifying earnings of each eligible jobholder in the range of £5,772 to £41,865, except for those who have opted-out. The eligible jobholder has to match the contribution personally.

Ascertaining whether a member has ‘qualifying earnings’ is a key test.

Unfortunately, qualifying earnings are defined in the context of employment language without being defined as employment income for tax purposes. One needs to delve into the LLP’s profit sharing arrangements to determine whether some or
all are qualifying earning i.e. equivalent to wages, salary, bonus or commission.

A guaranteed profit share payable whether the LLP makes profit or not sounds like a salary. In contrast, salaries are not refundable if the firm makes insufficient profit, so drawings on account of anticipated profit shares are perhaps not a
salary equivalent.

Again a performance award of a specific sum seems akin to a bonus. However, a profit share itself is not a bonus. Therefore, if a percentage of the firm’s profits are paid out on a performance points basis (where the £ per point varies with the profit
pool) then this looks more
like a profit share than a
specific bonus award.

It is frustrating that as yet there is no detailed guidance on these interpretations from the pensions regulator.

LLPs will need to take
care in reaching and documenting their conclusions on a self-assessment basis,
as there are penalties for not operating the auto enrolment regime correctly from the appropriate date.

Whatever a firm’s conclusions there will be a paperwork exercise to undertake. The full process needs to be followed
for those members who need
to be auto-enrolled, together with notifications in a specified form that allows the member
to opt out within a calendar month window.

Those that are not
auto-enrolled as eligible job holders need to be offered in writing the chance to join a scheme (albeit without the firm needing to contribute).

Finally, you will need to
check that your systems and pension provider can cope with auto-enrolling workers who
are not on a PAYE payroll. SJ

Louis Baker is head of national professional practices group at Crowe Clark Whitehill

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