Are LLPs caught by IR35?

[Bigbird]

If a small group of contractors who don't want to incorporate individually but tend to get work as a team wished to set up their own business, is an LLP worth looking at?

They are currently with an MSC which is clsoing its doors in April.

They don't want to become PSCs.

The options seem to be either form a Ltd Co between them which they administer themselves, paying salary and divis and claiming allowable expenses, or form an LLP. The individual tax burden looks to be greater with an LLP but they are being sold this idea by their MSC provider as they say it is totally outside IR35 as there is no salary involved - is this right?

The very fact that they work as a team IMO puts them outside IR35 anyway cos they can (and do) substitute for each other, having similar skills.......

[Bigbird]

Well actually that's a lie. If they formed the Ltd, I would do a lot of the admin for them and charge them accordingly so I might as well be honest and let you know that I have a hidden agenda here!

[oraclesmith]

My understanding of an LLP is that the partners would pay themselves like sole traders and therefore the HMRC aren't going to go after for them IR35 because it simply doesn't apply. The benefits of LLP might be getting the partnership to pay for items like cars for business use etc, so I reckon they're more likely to get investigated for expense abuse than IR35.

Anyhow, it doesn't sound like they would be top of the HMRC's IR35 list if they formed a limited. There are many more one man band contractors on long term contracts who take minimum salary and maximum divi's who would be a more obvious target. The divi's on a limited would work OK if all the participants were equal - eg. if they all had a share each, they would get an equal share of the profits - which might cause a few problems if someone is putting in more effort than others. They could vary the number of shares that each person has, but this would be fairly permanent. They might be able to structure it differently if there are a few who effectively own the company and some lesser mortals who are employees.


PS. Never let yourself by sold anything by an MSC supplier, because they're all looking for other outlets now that HMRC are closing down their little dodge.

[ASB]

Yes, an LLP is potentially caught. However given the way a partnership is taxed it seems that the take is not likely to be huge. Also there needs to be some obvious link between the fees generated and the remuneration drawn by the partners. I would imagine that it should be faesible to structure a partnership to be outside IR35. Whether or not a partnership itself is a good idea is a different thing.

[Bigbird]

Yes, an LLP is potentially caught.

Can you elaborate? The partners would be drawing their full income via the LLP and paying tax and Class 4 NI on it via their individual SA returns so there would not be any requirement for a PAYE scheme (unless they took on other employees, which may be an option for the future but certainly wouldn't apply to start with).

How could HMRC apply IR35, as there would be no vehicle by which salaries could or would be paid? Do I misunderstand IR35? I thought in brief it was that any income which could be deemed employment income if the individual's service company did not exist must be taxed as though it were PAYE income. I know that's over-simplifying it, but surely that's the gist of it? Would HMRC insist that the partners must be salaried? Can you even have salaried partners in an LLP?

Would there be any comeback on the client/agency for engaging the LLP do you think?

Sorry for the vast array of quastions but this idea is very new to me and I'm not all that well up on how an LLP operates and is taxed. It seems "wrong" but I just can't quite put my finger on why.

I still think this is a less tax-efficient way for them to operate as individuals, but so far that's the only argument I can raise against it.

[IR35 Avoider]

A partnership can be a caught intermediary for IR35 purposes in the same way that a company can. If they are a caught intermediary then they will have to pay tax (including employers NI) on deemed salaries in respect of the contracts and contractors affected. The simplest way to handle this would be to pay actual salaries or pension contributions to wipe out the IR35-liability, these together with the employers NI bill would reduce the taxable profits of the partnership.

I'm not sure if there's any double-taxation relief if the contractors have already been remunerated as partners. In the case of a company there is some scope for dividends not to be taxed again if the same income is being taxed via IR35, nevertheless if you try hard enough to screw things up I think it is possible to be taxed twice on the same income. On second thoughts "already remunerated as partners" doesn't make sense; the profits of the partnership are what's left after paying expenses, including any wage bill dictated by IR35.

A partnership can have employees, and I suppose a partner can also be an employee, but even if neither of these were true, IR35 says that the intermediary has to treat 95% of caught income for tax purposes as though it had been paid as salary etc. to employees. The fact that there may be no actual employees or actual salary paid doesn't reduce the tax bill.

p.s. I'm not an accountant and may be talking rubbish.

[ASB]

Can you elaborate? The partners would be drawing their full income via the LLP and paying tax and Class 4 NI on it via their individual SA returns so there would not be any requirement for a PAYE scheme (unless they took on other employees, which may be an option for the future but certainly wouldn't apply to start with).

How could HMRC apply IR35, as there would be no vehicle by which salaries could or would be paid? Do I misunderstand IR35? I thought in brief it was that any income which could be deemed employment income if the individual's service company did not exist must be taxed as though it were PAYE income. I know that's over-simplifying it, but surely that's the gist of it? Would HMRC insist that the partners must be salaried? Can you even have salaried partners in an LLP?

Would there be any comeback on the client/agency for engaging the LLP do you think?

Sorry for the vast array of quastions but this idea is very new to me and I'm not all that well up on how an LLP operates and is taxed. It seems "wrong" but I just can't quite put my finger on why.

I still think this is a less tax-efficient way for them to operate as individuals, but so far that's the only argument I can raise against it.

Briefly:-

- A partnership is pretty specifically included. See section 12 FA 2000 Para 1 Section (2). [Probably a different place in the current finance act]. This puts a partnership in the firing line as a potential intermediary.

- How would it it work? No idea. But the income in question is subject to the deemed payment rules.

It may well be easier to structure a partnership agreement which is not going to fall foul of the regulations. However if the agreement rewards the partners based on their billings then it's going to be dodgy (can't be bothered to look up the clause but it's effectively "could reasonably be taken to be income from the engagement").

Most agreements are likely to fall into the potentially caught category as a result of human nature. People tend to want their output based on their input.

Whether on not HMCR would actually try and attack a partnership is a different thing, as you say class 4 and schedule D is going to be not too far away from full schedule E anyway.

[IR35 Avoider]

class 4 and schedule D is going to be not too far way from full schedule E anyway.

But don't forget the employers NI bill. Who is liable for that? If the partnership cannot pay, can partners be held personally responsible if they have been negligent in assessing IR35 status?

I've often wondered what happens if a one-man company has no funds to pay employers NI if IR35 imposes a retrospective tax bill. If the director has not been negligent (i.e. merely wrong) in assessing past IR35 status, and chooses to operate via a different intermediary for future income, then do HMRC have to write it off? Tax and employees NI can be passed to an employee when the employer has failed to make the correct deductions, but I don't think that this is ever true for employers NI.

[ASB]

But don't forget the employers NI bill. Who is liable for that? If the partnership cannot pay, can partners be held personally responsible if they have been negligent in assessing IR35 status?

I've often wondered what happens if a one-man company has no funds to pay employers NI if IR35 imposes a retrospective tax bill. If the director has not been negligent (i.e. merely wrong) in assessing past IR35 status, and chooses to operate via a different intermediary for future income, then do HMRC have to write it off? Tax and employees NI can be passed to an employee when the employer has failed to make the correct deductions, but I don't think that this is ever true for employers NI.

If an intermediary does not make a deemed payment then it can be passed to the individual (although I suspect this would be counter productive because it may then make it difficult to reopen the relvant year for the intermediary).

However, regarding employers NI it is at least questionable whether this can be passed to the individual - personally I suspect that it would ultimately be upheld.

[tim123]

Surely Partnerships don't pay EENI on partner's earnings. Don't they pay the 'turnover based NI' (I forget the name) that Self Employed have to pay?

tim