Are partners really self employed?

A partner’s employment status—whether employed or self-employed—can raise questions for both tax and employment law purposes. A partner may be treated as self-employed for tax purposes but as an employee or worker for certain other legal purposes, depending on the circumstances.

Discrimination is an important issue in professional practices, particularly in law and accountancy firms, where concerns may arise about sex discrimination and unequal pay. Discrimination protections can apply to partners and other individuals regardless of whether they are self-employed for tax purposes. Equal pay and sex discrimination claims can also arise in partnership settings.

It can be difficult to establish whether a partner is self-employed or has employment law rights. To help, we have summarised some of the key indicators, drawing on our experience of advising partnerships and individual partners or members.

• Is the partner self employed for tax purposes
• Does the partner have employment law rights

Is the partner self employed

Partners who are self-employed for tax purposes may pay less tax overall than an equivalent employee, depending on their circumstances. However, HMRC has introduced anti-avoidance rules to address arrangements under which individuals who are effectively employees are treated as self-employed.

The tax rules differ depending on the type of partnership. In particular, the salaried member rules apply to members of UK limited liability partnerships (LLPs), rather than to all types of partnership. There is no single statutory definition of a partner or an LLP member that determines their status for every legal purpose.

Anti avoidance tax legislation applicable to all partners

Under the salaried member rules, an individual member of an LLP is treated as a salaried member for tax purposes if all three statutory conditions are met. If at least one condition is not met, the individual will generally fall outside these rules, although other tax provisions may still be relevant.

1. The partner’s remuneration is substantially fixed

Condition A is met where it is reasonable to expect that at least 80% of the amount payable to the member for their services will constitute a “disguised salary”. This includes remuneration that is fixed, varies without reference to the overall profits or losses of the LLP, or is not, in practice, affected by those profits or losses.

For example, remuneration based on an individual partner’s performance or the performance of a particular business division may still constitute disguised salary if it does not vary by reference to the overall profitability of the LLP. The extent to which a member shares in the LLP’s overall profits and losses can therefore be important.

2. The partner has significant influence

Condition B is met if the member does not have significant influence over the affairs of the LLP. The assessment considers the mutual rights and duties of the members and the LLP, including the member’s actual influence over the business.

Influence over only one aspect of the business, such as acting as Head of Finance, will not necessarily be sufficient. Whether a member has significant influence depends on the particular arrangements and circumstances.

3. The partner has made a sufficient capital contribution

Condition C is met if the member’s capital contribution to the LLP is less than 25% of the disguised salary reasonably expected to be payable to them for the relevant tax year.

The capital contribution must be assessed against the expected disguised salary, and the position should be reviewed when circumstances change. For example, if expected remuneration increases, the existing contribution may no longer be sufficient to prevent Condition C from being met. HMRC may also challenge artificial or short-lived increases in capital contributions designed to avoid the salaried member rules.

4. Other anti-avoidance legislation

Further anti-avoidance rules may apply where a partnership includes a corporate member. These rules are intended to prevent arrangements that use a company to reduce the overall tax burden on partnership income.

Genuine trading companies carrying on a separate business are not necessarily caught. The position depends on the relevant arrangements and applicable legislation.

A partner’s tax status should be reviewed regularly, particularly where their responsibilities, remuneration, capital contribution or level of influence changes. The relevant tests may need to be reassessed from year to year.

Is the partner employed?

If a partner qualifies as an employee or worker for the relevant employment law purpose, they may benefit from statutory rights and protections. The precise rights available depend on their status and the legislation concerned.

These issues often arise when a partnership proposes to remove or reduce a partner’s role, including where the individual is described as redundant. They can also arise in connection with alleged sex discrimination, failure to promote or differences in remuneration compared with colleagues.

Many disputes settle before reaching a final court or tribunal hearing. Identifying the individual’s legal status and assessing the available options at an early stage can therefore be important.

• The relationship between the individual and the partnership or LLP must be examined in substance. Being described as a partner or member, or being treated as self-employed for tax purposes, does not necessarily determine whether the individual has employment law rights.

The name alone will not disguise status

A range of factors may be relevant when determining employment status. These can include:

• Whether the individual receives fixed remuneration irrespective of the partnership’s profitability, or instead shares in the firm’s profits and losses.
• Whether the individual has an indemnity against partnership debts and liabilities, and the extent of any such protection.
• Whether the individual must make a capital contribution or is entitled to share in the partnership’s surplus assets.
• The individual’s right to participate in management decisions, management meetings and partnership votes.
• Whether the individual’s name appears on partnership documentation, whether they have authority to hire and dismiss employees, and whether they have banking authority.
• Whether the individual is genuinely carrying on business with a view to profit.

The relevance and weight of these factors will depend on the particular legal test being applied.

Control over members of a partnership or LLP

The level of control exercised over an individual can be relevant when assessing their status. The rights and responsibilities of a genuine partner, including participation in management and decision-making, may distinguish them from an employee. However, control is only one factor and should not be considered in isolation.

Indicators of employment status

The following factors may indicate an employment relationship, depending on the circumstances:

• The individual agrees to provide services to the partnership in return for wages or other remuneration.
• The individual is subject to the partnership’s control in performing those services.
• The other terms of the agreement are consistent with an employment relationship.

If a partnership or individual partner has concerns about their status, we can review the relevant documentation, assess the risks and explain the potential strengths and weaknesses of any claim, together with estimated costs. You can reach us on 0207 438 1060.