Synopsis: Impact of the anti-avoidance provisions to re-categorise income from “disguised employment” as employment income. Affected LLP Members seeking loans to inject sufficient capital to avoid income re-categorisation. Some LLPs reported to be considering incorporation.

Date posted: Tuesday, April 22, 2014

The new rules providing for the re-categorisation of the ‘remuneration’ taken by certain LLP members as employment income are now in effect.

These provisions are the best publicised of two sets of provisions aimed at preventing perceived abuse by partnerships and LLPs. The other provision operates to counteract unjustifiable allocation of profit or loss among mixed member partnerships. Typically, profit ‘excessively’ allocated to corporate partners (taxed at lower rates) and losses to individual partners (taxed at higher rates and so greater value derived from use of the losses).

The ‘disguised employment’ provisions only apply to LLPs though. Broadly speaking, if an LLP member satisfies all of the following tests then the amount they reserve from the LLP as a profit share will be re-categorised as employment income with onerous national insurance (and PAYE) consequences.

The three tests are:

1) that the individual performs services for the LLP in the capacity of a member and it is ‘reasonable to expect’ that the amounts they receive in return are ‘wholly or substantially wholly disguised salary’. Here a payment is disguised salary if it is a fixed amount, or a variable amount that is not in practice affected by the overall profits or losses made by the LLP.

(2) The second condition is that the individual does not have significant influence over the affairs of the LLP under mutual rights and duties afforded to its members.

(3) The final condition is that the individual’s capital or similar contribution is less than 25% of their disguised salary from the LLP in the tax year under review.

It has been reported that some potentially affected LLP members are weighing up the merit of contributing the requisite amount of capital to satisfy one of the tests and so avoid the application of the anti avoidance provisions. One bank (at least) has reported a significant surge in loan applications from potentially affected members.

It seems that the ‘capital contribution test’ (rather than the ‘significant influence’ of ‘profit linked feasibility’ test is felt to be the easier one to satisfy.

Another way to avoid the test is to eschew LLP status altogether and go for corporate status with, presumably, remuneration by dividend to avoid the NIC consequences.


This reported action is evidence, as if any were needed, that tax change does act as a lever on commercial decisions.

Financial planners with LLPs (and partnerships) as their clients should consider asking what, if any, affect the two anti avoidance provisions have on the firm.

If there is to be any change in the tax status of the business (especially if it incorporates) or the individuals e.g. from members/partners to employees or (in the case of a change to a corporate structure) shareholding directors then (even existing) financial planning strategies need to change to reflect this.

This should even extend to protection based strategies established or to be established to provide business succession or continuation solutions.

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