Brokers structured as LLPs face tougher rules

Brokers structured as limited liability partnerships (LLPs) face tougher rules than expected under new proposals contained in yesterday’s Finance Bill.

The LLP structure has become increasingly popular among brokers because of the flexibility it affords.

Over the summer the Treasury consulted on proposed tougher rules for LLP designed to filter out companies that use the structure as a way of cutting their national insurance bill.

Some LLPs – though not brokers specifically – had been awarding partnerships to regular employees so they would not have to pay their national insurance.

While the new rules were not specifically aimed at brokers, there have been concerns that some brokers who were using LLP structures legitimately would be caught out by the harsher measures, and brokers took advice on how they would be affected.

However, yesterday’s Finance Bill contained new, even tougher proposals, potentially rendering the advice brokers received over the summer useless.

Accounting firm PKF Littlejohn’s tax partner Chris Riley said: “The preliminary advice you may have received in the spring and summer will now need to be reviewed. It is quite likely that if you were on the boundaries you will fall on the wrong side.”

Under the original summer proposals, LLPs faced two tests to determine whether they were using their structures appropriately: whether people named as partners were exposed to their company’s financial risk, and whether or not they fit the statutory definition of an employee.

However, the new proposals announced in the Finance Bill scrap the statutory employee definition test. Instead, LLPs will have to show that partners’ pay is affected by the financial outcome, or that partners have contributed significantly to the company’s capital, or that they are involved directly in the day-to-day running of the entire company.

Riley said that while the new proposals eliminate some uncertainty involved with the statutory employee test, “they are potentially a lot more onerous than people considered previously.”

He asserted that the new tougher rules would not close the LLP route for brokers. He said: “For two people setting up a new business where they are both taking risks in setting up the business, then the LLP route is still potentially the one to go for.”

However he added: “Where there is going to be a concern is where brokers have introduced new partners into the business, perhaps promoting employees, and those employees are not taking significant financial risk.”