LLP members - employed or self-employed

HM Revenue & Customs (HMRC) appear consistent in their long expressed view that a member of a trading LLP is self-employed for tax purposes even if the individual was an employed partner on similar terms in a predecessor partnership. Whilst this view is generally in the taxpayer’s favour, we and other advisers in this field have expressed doubt as to its accuracy in certain situations, not least because the legislation appears to specifically anticipate employed members of LLPs.

To protect against a change of heart by HMRC, we typically advise that ‘salaried’ or fixed profit share (FSP) members of LLPs should be required to introduce some capital into the business and, ideally, receive some element of profit based compensation and bear some risk of sharing losses - the amounts involved need be little more than nominal, but in our view these are hallmarks of self-employed status.

A recent Employment Appeal Tribunal ruling, Tiffin v Lester Aldridge LLP, has confirmed that a member of an LLP can be an employee for employment law purposes. This affirms the position taken in the earlier case of Kovats v TFO Management LLP and The Family Group of Companies and, we believe, provides a framework for LLP Members’ agreements which should provide a strong defence to any challenge by HMRC.

The purpose of this briefing is to consider the wider tax implications rather than review the employment law aspects and so we will not delve into the detail of the Tiffin case beyond summarising that Mr Tiffin:

• was a fixed share partner in Lester Aldridge LLP;
• was required to contribute capital to the firm;
• had a relatively small points interest in the profits of the firm, in addition to his base ‘salary’;
• was entitled to a small points interest in any residue of the firm’s assets on winding up;
• was entitled to attend and vote at some, but not all, partners’ meetings; and
• was entitled to one vote on a show of hands (as were all partners) and the same number of votes as his number of points on other votes.

On consideration, the Tribunal found that these facts were all indicators of partnership status regardless of the relative size of the individual’s interest in the capital, profits or management of the firm. It is worth noting that these factors resonate with similar tests for the tax status of individuals and so appear to reinforce the advice that we would typically give.

Reference is made in the Tiffin judgement to an earlier case that established the principle that partnership could exist without an interest in the firm’s profits or capital, but the facts of that case do appear extreme and so we would not wish to place any reliance on it in discussions with HMRC.

The Tiffin case clearly demonstrates the importance of the LLP Members’ Agreement and the arrangements relating to profits, capital and management responsibilities and we strongly recommend that all LLPs with ‘salaried’ partners and/or FSPs review their agreements and, if necessary, update them to include similar rights and responsibilities to those granted to and borne by Mr Tiffin.