Charles Tyrwhitt, the well-known shirt retailer, is unusual for a business of its size in being structured as an LLP. But the issue that arose before the First-tier Tax Tribunal (‘FTT’) in [2020] UKFTT 272 (TC) may in principle arise in the case of an LLP of any size.
The LLP established for some of its employees what was described as a Long Term Incentive Plan (‘LTIP’). This provided for payment to participating employees of deferred bonuses calculated by reference to the performance of the business in a specified period.
Five employees had, when the time came for payments to be made to them under the LTIP, by then become members of the LLP.
The question before the FTT was whether the payments made to members were earnings from an employment (in which case Class 1 National Insurance Contributions were due) or a share of profit from the LLP (in which case they weren’t). Nor was the difference trivial: the amount of Contributions at issue was around £1 million.
The question whether a person can simultaneously be both a member of an LLP and an employee of it, is now (at least arguably) an open one, following the Supreme Court decision in Clyde & Co v Bates van Winkelhof [2014] UKSC 32. But the FTT were spared having to consider it; the Charles Tyrwhitt case proceeded on the basis that the employment had ceased on the individuals becoming members of the LLP: HMRC’s contention was that the bonuses were ‘deferred remuneration attributable to their former employment status’.
Initially, that had also been the view that the LLP had taken when the payments were made in 2013; it had operated PAYE and accounted for National Insurance Contributions. However, it subsequently concluded that it had been wrong to do so and claimed a repayment from HMRC. HMRC declined and the case reached the FTT.
The Tribunal concluded that the LLP had been right first time. It was indeed necessary to determine, as the LLP asserted, what was the ‘source’ from which the payments derived: but that question was not conclusively determined by the fact that at the time the bonuses became payable, the employment had ceased and the only relationship with the LLP was as member. On the contrary – the LTIP was conceived as a scheme for employees; it was only ever open to employees; and the LTIP bonuses were calculated by reference to periods throughout which the individuals were employees. They were employment income.
Even more galling to the LLP than the need to cough up nearly £1m must have been the Tribunal Judge’s postscript implying that it would have been simple to structure things so as to avoid that liability:
The remuneration of an employee of an LLP is a matter of contractual obligation between the LLP in its capacity as a legal person and each employee; the profit shares of members of the LLP are a matter between the members from time to time (no doubt normally, as in this case, set by the membership deed or an equivalent document). When the five employees became members it was, as far as I can see, open to all concerned to agree that the five would surrender their contractual rights against the LLP to a prospective LTIP bonus, in return for equivalent fixed amounts of additional profit share. Mr Southern did not suggest that that was done, and my untutored reading of the letter of 4 April 2014 varying the membership deed does not suggest to me that it was.
The clear implication is that if this had been done, the payment would unequivocally have been profit share and not employment income. Awks.
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This article was republished in Tax Journal Issue 1496 and is available on the Tax Journal website.
This article was also republished in TAXline (September 2020) and is available on the ICAEW website to ICAEW members.
