HMRC have published Tax Avoidance Spotlight 66, 'Limited Liability Partnerships arrangements used to disguise employment income'.
This spotlight highlights a tax avoidance scheme called 'The Partnership Model'. It has been marketed to companies as a way to avoid Corporation Tax and PAYE deductions of Income Tax and NIC by reclassifying employees as partners in Limited Liability Partnerships (LLPs).
HMRC has stated that the scheme is ineffective. Users of the scheme Remain employees, and payments made to them should be treated as employment income.
The Partnership Model
Under The Partnership Model:
- An employee signs an agreement allowing their Employment contract to be changed or terminated.
- In exchange, the employee is granted rights to a compensation payment upon termination or pay reduction, and in some cases, rights to additional future payments.
- The employment is then terminated or varied, and an LLP is created, with the employee becoming a partner.
- The compensation and additional payments are classified as capital contributions to the LLP. However, the employee does not actually receive these payments.
- Despite the changes, the employee continues to receive the same net pay as if their Employment status had not changed.
HMRC warns that scheme promoters may ask employees to register with HMRC as partners for Self Assessment purposes and submit annual Self Assessment returns, authorising the promoter to act as their Agent.
Employees may continue to receive documents resembling payslips, showing the tax and NIC they would have paid had they remained standard employees. These may be labelled as "partnership payslips" or "hypothetical payslips." However, the tax and NIC amounts shown are not deducted or paid to HMRC.
What to do if you’re using this or similar arrangements
Employees who believe they may have been included in this scheme should:
- Use HMRC’s payslip guide to understand what a legitimate payslip should look like, or
- If no payslip has been received, check that their Personal tax account matches their total pay information.
HMRC strongly recommends that employers currently using such schemes withdraw from them and settle any outstanding tax. Doing so would:
- Reduce interest and penalty charges on unpaid tax,
- Help avoid costs associated with investigations and potential legal actions.
Promoters
The spotlight reminds promoters of the scheme that they must disclose the scheme to HMRC under the Disclosure of Tax Avoidance Scheme (DOTAS) rules or face penalties of up to £600 per day.
Useful guides on this topic
LLP members and NICs
How are Limited Liability Partnership (LLP) members treated for the purposes of National Insurance Contributions (NICs)?
Employment status: Partners
What is the employment status of a partner in a partnership or a member of an LLP? Are partners/members employed or self-employed?
When does a partnership exist?
When does a partnership exist? Why does it matter? What are the implications for different taxes?
Setting up as a tax agent
What do you need to consider when setting up as a tax agent? What are the steps? How do you register with HMRC?
DOTAS: Disclosure of Tax Avoidance Schemes
What are the Disclosure of Tax Avoidance Schemes (DOTAS) rules? When should you disclose your use of a tax avoidance scheme? What are the consequences of non-disclosure? How are penalties calculated?
Penalties: Enablers of Tax Avoidance (subscriber version)
What penalties apply to Enablers of Tax Avoidance? When do they apply? Who is an enabler?
HMRC Tax Settlement Facilities 2024-25
HMRC provides special tax settlement facilities and opportunities to allow taxpayers to notify undeclared income or gains over a range of different taxes. Facilities are provided via special links to enable taxpayers to settle unpaid taxes.
Anti-avoidance: HMRC's spotlights
What are HMRC's Spotlights and where can you find them?
External links
HMRC: Limited Liability Partnerships arrangements used to disguise employment income (Spotlight 66)