HMRC has recently issued surveys in collaboration with IFF Research, to randomly selected LLP members, regarding the taxation of Limited Liability Partnerships (LLPs).
The intention of this latest survey is to help HMRC gain a better understanding of members' knowledge around their LLP structure and legal requirements, and they are keen to focus on two areas – salaried members and mixed members.
The survey request notes that answers will be kept confidential, and an assurance is provided by HMRC that there will be no impact on future dealings with them. However, we would urge caution in your response to the survey as the structure of LLPs can be complex and there is a risk your firm and its members may be misrepresented in the responses.
LLP Salaried Member rules
LLPs are a popular structure for businesses; they give members security with regard to their liabilities, whilst allowing the business the flexibility that comes with partnerships. They are, however, more complex than standard partnerships for this reason and have additional specific rules. In order to be classed as a member, at least one of the criteria below must be met.
The salaried member rules for LLPs are complex; there are three rules that focus on disguised remuneration, influence and capital contribution.
A. Disguised remuneration – is the income received and, to all intents and purposes, a salary, i.e. how tied into the final assessable profits is the individual’s profit share? If the LLP makes a loss, does the individual still receive an agreed amount as an employee would?
B. Significant influence – how much say in business decisions does an individual have? Do they have little to none?
C. Capital contribution – is a member’s capital contribution less than 25% of the ‘disguised salary’ it would be reasonable to expect them to receive during the tax year? This must also be coupled with a ‘risk of losing capital’.
It is interesting to note in the survey that has been issued that one specific question is ‘How many members meet all three conditions’. Could this mean that HMRC might be considering a shift whereby all three criteria need to be met to be considered a salaried member?
What is a Mixed Member LLP?
Mixed member LLPs are those that include a combination of both individual and non-individual (usually company) members. Since 2014, these types of LLPs have had an even tighter set of legislation surrounding them to ensure that profit splits between members are not done for tax-motivated reasons.
Why the sudden interest in LLP structures?
Both the salaried member rules and mixed LLP structures have been a hot topic for HMRC for a number of years now.
Recent cases, for example, Bluecrest, a case where the salaried member rules are being applied, show that HMRC are beginning to challenge more often. An increase in investigations into mixed member LLPs again demonstrates where HMRC are focusing their attention.
Should you respond to surveys of this type?
As with all surveys of this nature, a response is not required, and the letter does advise this.
It will be difficult for LLPs to understand who has responded from their firms, as the letters are being sent to individuals. It is therefore suggested that you contact each of your members to advise that the surveys may be being sent and have a firm policy with regards to how you would like members to respond.
The questions in the survey, we feel are quite vague, and as with all LLPs, the detail of structure and management lies in the partnership agreements. If a member does not fully understand the HMRC rules, they may give a skewed response.
What’s the risk?
A concern with surveys of this nature, although confidential, is that the information gathered could be used to focus HMRC’s lines of enquiry and guide further updates to the already complex rules, adding further pressure on firms, and increasing the likelihood of targeted HMRC queries.
If you have questions about the survey, or your LLP structure in general, please do not hesitate to contact us.
