Upper Tribunal upholds £1 million NIC liability on bonus payments

In Charles Tyrwhitt LLP v HMRC [2021] UKUT 0165, the Upper Tribunal (UT) upheld the decision of the First Tier Tribunal (FTT) that found that bonuses awarded to five individuals whilst they were members of an LLP were in fact related to their former roles as employees. As such NICs amounting to about £1 million were due on the payments.

•  The Limited Liability Partnership (LLP), a clothing retailer, set up bonus schemes for its senior employees in 2008.
• The scheme letters, setting out the terms and conditions, expressly stated:
  • That the schemes were intended for "directors and other senior management".
  • Eligibility depended on the individual still being employed or not having left as a 'bad leaver'. Under the original wording, becoming a member of the LLP could have meant the individual was classed as a bad leaver and so would lose entitlement to the bonus.
  • This eligibility criteria was changed after a decision to promote certain individuals to members, so as to ensure they did not lose that entitlement. Eligibility based on remaining employed was changed to being based on their remaining 'appointed' which included being either an employee or a member.
  • A new clause stated that the LLP would pay the appropriate tax depending on whether the individual was an employee or a member at the time of payment.
• The individuals whose bonuses were the subject of the Appeal received the payments in the 2013/14 tax year. Those in the first scheme became members on 1 August 2012. Those in the second scheme became members on 4 August 2013.
• Class 1 National Insurance Contributions (NICs) were originally accounted for, but the LLP submitted claims for a repayment after receiving new advice. HMRC rejected the claims and considered the LPP liable for both primary and secondary Class 1 NICs.

The FTT held that the scheme was for the benefit of employees and the bonuses paid were in respect of that employment. The fact that the terms of the schemes were amended was purely to allow the employees to keep their entitlement after termination of their employment. Had they simply have left the LLP instead, there would have been no doubt that the payments were employment related.

The LLP appealed on the grounds that the FTT had erred in law by failing to characterise the payments as shares of profits. The UT found that:

• The classification for NIC purposes would be the same as for Income Tax purposes and depended on whether the payment was 'from employment'.
• The bonus payments were received in the individuals' capacity as former employees as set out in the contracts. The rights arose when they were employees and remained unaffected by the transition to members.
• The fact that the conditions for entitlement to the payment were not met until after the employment was terminated does not stop the payments being derived from that employment.
• There was no evidence that at any time the LLP had agreed with the members that the payments would be received as an addition to their share of profits.

The UT held that the payments were from employment and the appeal was dismissed.

Useful guides on this topic

Starting work 1. Self-employed or employed?
If you are finding work what is the difference between being employed or self-employed?

Starting work 3. How to work out if you are an employee
How do you work out your tax if you are an employee? In this part of our starting work guides we look at: How are employees taxed?

Partnerships: Unlimited or limited?
An introduction to partnerships. What types of partnerships are there? What are the differences? 

Employment status: Partners
What is the employment status of a partner in a partnership? Are partners employed or self-employed?

LLP members and NICs
From 6 April 2015 inactive members of Limited Liability Partnerships (LLPs) are liable for Class 2 NICs.

How to appeal an HMRC decision
Disagree with a HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External link

Charles Tyrwhitt LLP v HMRC [2021] UKUT 0165