Disguised Employment Within LLPs
- Taylor Keeble
- 4 days ago
- 3 min read
Members of a Limited Liability Partnership (LLP) are generally treated as self-employed for tax purposes. However, HMRC has long been concerned that some members, particularly those with a fixed profit share, are not truly partners but are instead working in a way that closely resembles employment. This situation is often referred to as “disguised employment”.
Before the relevant “anti-avoidance” rules were introduced, members of an LLP were always taxed as self-employed, even if they received a fixed salary and had little involvement in running the business. In an ordinary partnership, however, someone on similar terms could be treated as an employee if they were not truly sharing in the risks of the business. This created a disparity, as employees typically pay higher National Insurance contributions, and the partnership must also pay employer’s National Insurance. Rules were therefore introduced to prevent LLPs from being used to avoid employment taxes.
What the Rules Mean
Where a member of an LLP meets all three statutory conditions, they are treated as an employee for tax and National Insurance purposes. Their income from the LLP will be taxed as employment income, PAYE must be operated, and any benefits such as company cars will be taxed in the same way as for other employees. The LLP will then receive a tax deduction for the salary and related costs when calculating its trading profits.
If any one of the three conditions is not met, the individual continues to be taxed as self-employed. The rules are not intended to catch genuine partners who are actively involved in running the business and sharing its risks.
The Three Conditions
To be taxed as an employee, all three conditions must be satisfied:
Condition A — Disguised Salary
This condition looks at how the member is remunerated. If it is reasonable to expect that 80% or more of their pay will be fixed, or linked to personal or divisional performance rather than the overall profits of the LLP, then it is considered as “disguised salary.”
Examples include a fixed monthly salary or a bonus linked solely to individual performance. By contrast, if remuneration is dependent on the LLP’s overall profitability, Condition A is not met.
This test is applied when a member joins the LLP or when their remuneration arrangements change. It usually covers a 12-month period, as that is how long most arrangements remain in place before review.
Condition B — No Significant Influence
Condition B looks at the individual’s influence over the running of the business. If they do not have a meaningful say in the strategic direction of the LLP, for example, if they simply carry out work rather than participate in key management decisions, this condition will be met. Members with a genuine role in decision-making about the business as a whole are unlikely to meet this condition.
Condition C — No Significant Investment
The final condition considers the member’s financial investment in the LLP. If their capital contribution is less than 25% of their expected “disguised salary” for the year, Condition C will be met. This ensures that only those with a meaningful financial risk in the business can remain taxed as self-employed.
Why This Matters
These rules have a significant impact on LLPs that engage members on fixed profit share or salaried terms. Getting the classification wrong can lead to costly PAYE and NIC liabilities, plus interest and penalties.
Firms should regularly review their members’ remuneration structures, decision-making rights, and capital contributions to ensure compliance. Where necessary, changes can be made, for example, adjusting capital contributions or altering rights within the LLP agreement, to ensure that genuine partners are not incorrectly taxed as employees.
Speak to an Expert
LLPs should consider carrying out a review whenever new members are admitted or when remuneration arrangements are updated. Applying the tests at the right time and documenting the reasoning behind each conclusion can help protect the firm from HMRC challenge later.
Authored by: London Team
