Category: HMRC notices

LLP salaried members

Not all LLP members are taxed as partners. HMRC may treat them as employees if they meet certain conditions. Here's how the salaried member rules work, what the three-part test involves, and who’s excluded from the legislation.

The salaried member legislation can apply to certain members of a Limited Liability Partnership (LLP). This can happen where HMRC consider that a member of an LLP is not a risk-taking partner and can be re-classified as a salaried member.

Prior to 2014, all individual members of an LLP were taxed as if they were a partner. The salaried member legislation brought in new provisions that means that individual members of an LLP are effectively treated as employees for tax purposes.

The legislation includes a three-part test to see if LLP members should be taxed as salaried members. If all three parts apply, then the member will be considered a salaried member.

In a simplified format they are:

• Condition A: a member’s regular payments from the LLP have the characteristics of a “disguised salary”, i.e., at least 80% of the member's pay is fixed or if variable do not vary in line with actual profits and losses of the LLP.
• Condition B: a member has no significant influence over the affairs of the LLP.
• Condition C: a member’s capital stake in the business is less than 25% of their expected reward package.

As long as an LLP member is able to demonstrate that at least one of the three conditions does not apply to their circumstances, they will continue to enjoy the status of a regular partner. HMRC’s internal manuals include a number of examples to help clarify how these rules are applied in practice.

This means that the salaried member provisions do not apply to:

• companies
• individuals who do no more than invest money
• individuals who no longer perform services for the LLP but who continue to receive a profit share.

Records you must keep if self-employed

If you are self-employed as a sole trader or a partner in a business partnership, you are required to maintain suitable business records as well as separate personal income records for tax purposes.

For tax compliance, these business records must be kept for at least five years from the 31 January submission deadline of the relevant tax year. For instance, for the 2023-24 tax year, where online filing was due by 31 January 2025, you must retain your records until at least the end of January 2030. In some situations, such as when a return is filed late, you may be required to keep the records for a longer period.

As a self-employed individual, you should keep a record of the following:

• All sales and income
• All business expenses
• VAT records if you're VAT registered
• PAYE records if you employ anyone
• Records of your personal income
• Details of any grants received if you claimed using the Self-Employment Income Support Scheme (SEISS) due to coronavirus

You don't necessarily need to keep the original physical records. Most records can be stored in an alternative format, such as scanned copies, as long as they can be retrieved in a readable and uncorrupted format.

If any of your records are lost or unavailable, you must attempt to reconstruct them. If the figures are estimated or provisional, you must inform HMRC accordingly. Failing to keep proper or accurate records can result in penalties.

How far back can HMRC assess under-declared taxes?

From income tax to VAT, HMRC has specific time limits for issuing tax assessments. Depending on the circumstances—whether it’s standard, careless, offshore, or deliberate behaviour—these limits can stretch from 4 to 20 years.

HMRC’s time limits apply in different ways to various taxes, including income tax, capital gains tax, corporation tax, VAT, insurance premium tax, aggregates levy, climate change levy, landfill tax, inheritance tax, stamp duty land tax, stamp duty reserve tax, petroleum revenue tax, and excise duty.

There are four time limits within which assessments can be issued. These are:

• 4 years from the end of the relevant tax period
• 6 years (careless) from the end of the relevant tax period
• 12 years (offshore) from the end of the relevant tax period
• 20 years (deliberate) from the end of the relevant tax period

The 4-year time limit is the standard time limit for all taxes.

The 6-year time limit applies when taxes have been lost due to the careless behaviour of the taxpayer, or another person acting on their behalf.

The 12-year time limit applies when taxes have been lost due to an offshore matter or offshore transfer. This also applies if reasonable care was taken, or the behaviour is considered careless by the taxpayer or another person acting on their behalf.

Lastly, the 20-year time limit applies when taxes have been lost due to the deliberate behaviour of the taxpayer or another person acting on their behalf, or if the taxpayer has failed to comply with specific historic obligations for periods ending before 1 April 2010.

Treatment of post-cessation receipts and payments

When a trade ends, income doesn’t always stop. Post-cessation receipts can still arise, and knowing how they are taxed is crucial. Whether it’s Income Tax or Corporation Tax, the recipient—not necessarily the original trader—bears the responsibility.

There are special rules for the taxation of post-cessation receipts after a trade has ceased. The legislation clearly states that the person who receives or is entitled to the post-cessation receipt is the person who is subject to Income Tax or Corporation Tax on the income. This person does not necessarily have to be the same one who was originally carrying on the trade.

The only factor to consider when determining whether these rules apply is whether the income qualifies as a post-cessation receipt. If it does, then, unless a territorial exclusion applies, the income is taxable for the recipient.

The legislation provides for the taxation of certain receipts arising from the carrying on of a trade which:

• are received after a person permanently ceases to carry on a trade;
• arise from the carrying on of the trade before the cessation; and
• are not otherwise subject to tax.

In addition to income meeting these conditions, the legislation specifically identifies other types of income treated as post-cessation receipts. There are also certain receipts, such as payments for the transfer of trading stock, which are specifically excluded from being classified as post-cessation receipts.

How umbrella companies work

Umbrella companies offer an easy way for freelancers and contractors to get paid without running a limited company. They handle payroll and tax via PAYE, ensuring compliance and employment rights. But are they the right choice for you? Consider the pros and cons.

Essentially, an umbrella company acts as an intermediary between the worker and the end client (or recruitment agency), handling payroll, taxes, and other administrative tasks on behalf of the worker.

The worker enters into a contract with the umbrella company. In most cases, the umbrella company employs the worker and pays their wages through PAYE. The umbrella company then enters into a separate contract with the client or recruitment agency who requires the worker's services.

As an employee of an umbrella company, a worker has the same employment rights as other employees including the right to a written employment contract.

There are many advantages to using an umbrella company, this can include simplifying tax obligations, employee rights and IR35 compliance. Some of the disadvantages can include the costs of using the umbrella company, limited control and the overall tax burden may be higher compared to other structures that may be available.

Selling online and paying tax

Selling online? Whether it’s a hobby or a business, you may need to pay tax if your earnings exceed £1,000. From services to content creation, it’s vital to understand self-assessment rules and new reporting obligations for online platforms starting in 2024.

If you are selling anything through an online marketplace, it is important to know that you might be liable to pay tax, whether it is your main source of income or just something a part-time hobby. This applies to a range of activities, so it is worth understanding when you need to register for self-assessment and pay tax.

You may need to report your earnings and pay tax if you are doing any of the following:

• Buying goods to resell, or making things to sell (even if it’s just a hobby that you sell items from);
• Offering services online, such as dog walking, gardening, repairs, tutoring, food delivery, babysitting, or hiring out equipment;
• Creating online content, whether that's videos, podcasts, or even social media influencing; or
• Earning income by renting out property or land, like letting a holiday home, running a bed and breakfast, or renting out a parking space on your driveway.

There is a Trading Allowance you can claim that allows you to earn up to £1,000 a year from self-employment without having to pay tax or register as self-employed. But if you go over that £1,000 threshold, you will need to register with HMRC as self-employed and submit a self-assessment tax return.

If you are just selling personal items, such as second-hand clothes or unwanted electrical goods, you typically do not need to worry about registering for tax. This is not considered a business activity, so it does not count as trading in the eyes of HMRC.

For those using online platforms to sell goods or services, there are new reporting obligations. Any relevant information about your sales may be reported to HMRC by the platform you use. There is a new requirement for online platforms to report pertinent information collected about online sellers between 1 January 2024 to 31 December 2024 to HMRC by 31 January 2025. This will only happen if you have sold 30 or more items or earned £1,700 (or €2,000) in the calendar year. The platform will also provide you with a copy of the information they send to HMRC, which can be helpful when you need to submit your own tax return.