Employees in partner’s clothing? HMRC in ‘aggressive pursuit’ of LLPs
HMRC is actively writing to limited liability partnerships (LLPs) as firms race to reassess their members’ tax status after the landmark legal ruling, even as both sides “hold their cards close to their chests.” Members of an LLP are treated as self-employed partners, meaning they don’t pay the 15 per cent employer’s national insurance contributions [...]
The UK's HM Revenue and Customs (HMRC) is intensively contacting limited liability partnerships (LLPs) as firms rush to reevaluate the tax status of their members following a landmark Supreme Court ruling. While both parties are cautious, the legal precedent has emboldened the tax agency to scrutinize the classification of partners.
Members of an LLP are considered self-employed, exempting them from paying 15 percent employer's national insurance contributions on their earnings. To evade tax, firms are naming staff as 'partners', but the Supreme Court ruled that members must meet at least one of three specific conditions to be deemed employees for tax purposes.
In July, the court affirmed the taxman's argument that portfolio managers at Bluecrest Capital Management, a UK hedge fund founded by the wealthiest financier, were functionally employees, not legitimate partners. This decision has thrown the LLP model into turmoil and intensified HMRC's focus on the broader professional services sector, a significant user of the LLP structure.
Adam Craggs, a partner at RPC, revealed that substantial professional services firms have recently sought his expertise following the Supreme Court's decision. Miles Dean, managing director at Andersen UK, stated that HMRC will investigate whether individuals labeled as partners are genuinely operating as business owners or are, in reality, highly paid employees dressed in partnership attire.
Sue Robinson, principal in Ryan's employment tax practice, noted that LLPs are being cautious and not openly discussing their status due to sensitive concerns. HMRC's resources have been bolstered as part of Labour's 'Close the Tax Gap' initiative, aiming to recover unpaid taxes. The Bluecrest case, which resulted in £200 million in tax fees and legal costs, highlights the potential financial exposure for those whose status is deemed similar.
Dean explained that HMRC's predictive analytics tool, Connect, will be instrumental in filtering cases, as it can rapidly cross-reference data from various sources. However, the process is expected to be gradual, as HMRC must proceed case-by-case. A HMRC spokesperson stated that the Supreme Court's ruling provided clarity on the implementation of the salaried member rules and that they are considering updating their online guidance to assist firms in determining the right tax status for their partners.
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