What are you searching for?
News & Publications

LLP members - employee or self employed?

◄  Return to News
16 October 2014

It has been a year of upheaval for professional partnerships, and in particular limited liability partnerships (LLPs), with fundamental changes made to the way partners are taxed. 

The purpose of this article is to look at the change in rules in respect of disguised employment for LLPs.


There has been a long-standing presumption of self-employment for LLP members which HMRC have looked to change.  Since LLPs came into existence in 2001, all members have been treated as self-employed for tax purposes, irrespective of their relationship with the LLP.  The advantage here is employer’s National Insurance contributions, which would be payable if the LLP member were instead taxed as an employee.

Effect of the rules

After a long consultation process and substantial changes to the tests to determine whether an LLP member should be taxed as an employee the new rules have been finalised and formed part of the 2014 Finance Act.  A summary of the new rules is set out below.

A member of an LLP will be a “Salaried Member” and taxed as an employee with effect from 6 April 2014 where the following three conditions are all met:

Condition A

It is reasonable to expect that 80% or more of the amount payable to the member for their services as an LLP member:
  • it is fixed,
  • is variable, but is varied without reference to the overall amount of the profits or losses of the LLP, or
  • is not, in practice, affected by the overall amount of profits or losses.

Condition B

The mutual rights and duties of the members and the LLP do not give the member significant influence over the affairs of the LLP.

Condition C

The member’s capital contribution to the LLP is less than 25% of the amount payable to the member for their services as an LLP member during the tax year.

Practical considerations

Condition A
  • The test is applied at 6 April 2014, when a new member joins and whenever there is a change to the way a member’s profit share is calculated.
  • The test is applied for the period over which a member’s profit share arrangement is in place (typically a 12 month period where there is an annual pay review, but could be longer) and reapplied at the end of that period.
  • Profit shares which appear to be variable but which, in practice, are not varied in reference to profitability will be treated as fixed.
  • Variable profit shares (including bonuses) must be linked to the LLP’s overall profits, not to personal or departmental performance or turnover.
  • It is the member’s profit share that is measured, and any drawings paid on account of it are ignored.
  • The test is applied looking forward and the amount of the variable profit share will need to be based on profit forecasts when assessing the 80% threshold.
  • The test is applied to profits available for allocation between the members, i.e. profit per the statutory accounts.
  • Profit sharing arrangements need to be clearly documented at the time the test is applied.

Condition B
  • The test is applied at 6 April 2014, when a new member joins and whenever there is a change to the rights and duties of the members and the LLP.
  • Where the LLP has a management board, members not on the board are very unlikely to have significant influence.
  • The member must have significant influence over the LLP as a whole, not just a department or office.
  • The kind of decisions made by a member with significant influence might include:
    - appointment of new members
    - deciding where the firm conducts its business
    - deciding the firm’s areas of business
    - strategic decisions
    - deciding on business acquisitions or disposals
    - management of key contracts relating to the firm generally (e.g. with the bank)
    - appointment of key personnel
    - allocation of roles to key staff
    - decisions on important financial commitments
    - formulating the firm’s business plan
    - approving major new clients or investments, especially where this is a regulatory requirement
    - deciding the firm’s marketing strategy
  • The rights and responsibilities of members need to be clearly defined in the LLP Agreement and this needs to be an accurate reflection of what happens in practice.

Condition C
  • This test is applied on 6 April 2014, when a new member joins, on each 6 April thereafter and whenever there is a change to the member’s contribution to the LLP or to the way a member’s profit share is calculated.
  • The test is applied to the member’s expected profit share for each tax year (in contrast to Condition A, where the test is applied for the period over which a member’s profit share arrangement is in place).
  • The capital contribution is the amount of money or other property that the member has contributed in accordance with the LLP Agreement to the permanent endowment of the LLP.
  • The contribution includes undrawn profits provided the members have, by agreement, converted those profits into capital.
  • The contribution does not include amounts that the member can be called upon to introduce, amounts held by the LLP for the benefit of the member (e.g. tax reserves) or amounts that are not at economic risk or are not permanent in nature.
  • The contribution need not be classed as capital in the LLP accounts – members’ loans can be included, provided they are long-term and have the same degree of permanence as capital.
  • A member was deemed to have made a contribution at 6 April 2014 provided an undertaking was given for it to be made by 5 July 2014 and the contribution was actually made by that date.
  • A new member is deemed to have made a contribution at the date of joining provided an undertaking is given for it to be made within two months of joining (or by 5 July 2014 if later) and the contribution is actually made by that date.
  • Where the member enters into financing arrangements to fund the contribution, the contribution will be ignored where:
    - it derives from a non-recourse or limited recourse loan,
    - there is a circular movement of funds between the LLP and the member (i.e. the LLP loans the contribution back to the member after it has been made or loans the member the funds to make the contribution),
    - the LLP pays or otherwise bears the interest cost (unless the LLP pays the interest as agent for the member and the member bears the cost as drawings or as a deduction from profit share), or
    - the LLP’s bank provides the funds to the member and in consequence the LLP reduces its own exposure to the bank.
  • The member’s contribution and its enduring benefit for the LLP should be clearly set out in the LLP Agreement.


As you will have noted, for each condition it is important that the LLP Agreement clearly documents the facts leading to the condition being failed.

Given the implementation date of 6 April 2014 it is envisaged that most practices will have already considered the new rules and how they apply to their LLP members, however, if you have any questions or concerns please do get in touch.