Limited Liability Partnerships arrangements used to disguise employment income (Spotlight 66)
Find out about a tax avoidance scheme used by companies to reduce their tax liability.
HMRC is aware of a tax avoidance scheme called ‘The Partnership Model’ being marketed to avoid payment of tax and National Insurance contributions. The arrangements are targeted at companies who have employees and are designed to avoid the payment of Corporation Tax and the PAYE deduction of Income Tax and National Insurance contributions from their employees.
HMRC’s view is that this scheme does not work. Scheme users continue to be employees and payments made to them from the company should be treated as taxable employment income.
How the arrangements claim to work
An employee of a company enters into an agreement. As a result of this agreement the employee’s employment contract could be changed or terminated in exchange for a compensation payment.
Upon entering the agreement, a Limited Liability Partnership (LLP) is created to pay an employee. This allows the company through the use of the LLP to disguise employment income, with the aim to reduce the company’s tax and National Insurance liability. The arrangements are claimed to work as follows:
- Employees who are involved in the scheme may be asked to sign one or more documents described as the following agreements:
- Variation and Settlement agreement (VASA)
- Compromise agreement
- Transfer agreement
- Intellectual Property (IP) agreement
- Partnership agreement
- Deed of Adherence
- Members agreement
- Naming agreement
- Methodology agreement
2. These agreements give the employee the right to a compensation payment for the termination of their employment or for reducing their pay, or both.
3. The employee’s employment is then terminated or varied under the terms of the agreements, or both.
4. The employee becomes a partner of an LLP and the compensation payment is treated as a capital contribution to the LLP.
5. Under the terms of the agreements the employee may be entitled to additional payments — these payments are also treated as capital contributions to the LLP.
6. The employee never receives any of the payments they are entitled to under the agreements.
7. The employee continues to receive the same net pay as if their employment had not been terminated or changed.
Those involved in the supply of this scheme (the promoter), may ask employees to register with HMRC as a partner for Self Assessment tax purposes. Employees will then be asked to submit annual Self Assessment returns and to authorise the promoter to act as their agent.
Employees may continue to receive documents that might be described as payslips showing the tax and National Insurance contributions they would have paid on their earnings if they had remained as a standard employee. These may be described as:
- partnership payslips
- hypothetical payslips
However, the tax and National Insurance contributions shown are not deducted or actually paid to HMRC.
You can use the payslip guide to understand what your payslip should look like to make sure you’re not involved in these arrangements. If you do not get a payslip, check the pay and tax information in your personal tax account matches with what you are being paid in total.
What to do if you’re using this or similar arrangements
If you’re an employee or employer and worried about becoming involved in a tax avoidance scheme, or think you’re already involved and want to get out of one, HMRC can help. HMRC offers a range of support to get you back on track or avoid being caught out in the first place. Contact HMRC if you have any concerns.
If you’re using this or similar schemes or arrangements, HMRC strongly advises you to withdraw from it and settle your tax affairs.
By withdrawing from the arrangements and settling your tax affairs, you’ll:
- minimise interest and penalty charges (where they apply) on tax you should have paid
- avoid any costs of investigation and litigation
Anyone concerned about the schemes they are currently using should consider:
- getting independent professional tax advice
- speaking to one of the tax charities, such as TaxAid — find out more about the TaxAid helpline on the TaxAid website
What this means for promoters
Scheme promoters must comply with the disclosure of tax avoidance schemes (DOTAS) legislation, making sure that arrangements they are marketing are disclosed to HMRC.
Promoters will be liable to a penalty if they fail to disclose a scheme to HMRC within 5 days of the scheme being made available or implemented. The initial penalty is up to £600 a day. If this is not considered to be sufficient deterrent, promoters may have to pay a penalty of up to £1 million.
HMRC will pursue anyone who promotes or enables tax avoidance. This includes using the enablers penalty regime for anyone who:
- designed the arrangement
- sold the arrangement
- enabled the use of the abusive arrangement which is later defeated by HMRC
HMRC will also use its powers under the Promoters of Tax Avoidance Schemes regime against those who continue to promote tax avoidance schemes.
HMRC can also publish information about promoters, enablers and suppliers of tax avoidance arrangements under the publishing legislation included in Finance Act 2022 (the ‘2022 legislation’).
Report a scheme
You can report tax avoidance arrangements, schemes and the person offering you them to HMRC by using the report tax fraud online form. You can submit this form anonymously and do not have to give your name, address or your email.
You can phone HMRC to report tax fraud if you cannot use the online form.