The impending tax changes for the taxation of the members of LLP have been generating significant concerns, not only for our LLP clients but also Law firms themselves. The prospect of firms having a NIC liability, and the tax consequences for individual members themselves, have concentrated legal minds both internally and externally.
Internally the focus has been on possible changes in membership arrangements so that at least one of the three conditions for employee status is not met. Many firms will have remuneration structures which do not link remuneration to the profits of the LLP as whole (Condition A). The earnings of members may be linked to the profitability of their areas of the business. Equally very junior members may be on fixed remunerations as may be more senior members who may be perceived as being at the end of their careers.
Changing the remuneration structures so that the remuneration more closely reflects the performance of the firm as a whole is more likely to adversely impact on the earnings of those whose remuneration is linked to their only particularly successful business area. Wide changes to remuneration structures, with conditions A and C (the capital contribution condition) may, under the membership agreement, require specific levels of voting support which might be not be achievable before the impending tax changes.
There is an understandable focus on the conditions themselves and the anti avoidance provisions but it is vital not lose sight of the wider implications of the protections for members, quite aside that is from the consideration, by the Supreme Court in March 2014, of whether members may have worker status in Bates van Winkelhof v Clyde and Co.
Members of LLPs clearly enjoy the protection of the Equality Act 2010 (under s.45) and two protected characteristics immediately come to mind, age and gender. Issue of indirect discrimination may arise for both of the characteristics as result of modifications or changes of policy to meet the requirements of the tax conditions, in particular conditions A and C. If, for example, an LLP proposed seeking capital contributions from members, so that condition C may be met, or perhaps more specifically from those on fixed remunerations who may have made limited capital contribution to the LLP this may place two age brackets at particular disadvantage by comparison with other age groups: older members towards the end of their career on fixed remuneration or junior members in a younger age bracket. Equally where memberships have embraced members whose child care commitments have led to them to have fixed shares similar issues may arise. Equally, if the LLP were to decide, having considered Condition A, that certain of its members would in future receive non-fixed contributions by reference to the overall profit of the LLP, but that others members would not, careful thought would need to be given to the criteria used by the LLP to decide which member would in future be remunerated in this way. Indirect discrimination could easily creep in.
Problems may also arise in relation to condition B (the significant influence condition), if firms try to change the managerial structure in order to comply, as some individuals may lose out and be aggrieved. As the Law Society has pointed out in it Written Evidence submitted on 23 January 2014, Condition B assumes that all individuals carrying on business in common (particularly in large firms) have significant influence over the affairs of the whole business, whereas in fact some have managerial responsibilities but others focus on rainmaking and client relationships but are equally important to the LLP. It is clear that guidance will be needed as what significant influence means.
The critical practical lesson is that it is important to have regard to the wider implications of changes affected to address the impending tax change.