Although we are all familiar with the adjective ‘self-employed’, it is a logically nonsensical term: you cannot as a matter of law enter into a contract of service with yourself so as to become your own employee.
By the same token, you cannot be both a partner in an English partnership and an employee of it: but the position is much less clear when it comes to an LLP established under the Limited Liability Partnerships Act 2000 (‘LLPA 2000’).
Peter Wilson is the latest in a line of cases in which the question has been considered – in this case, by the Upper Tribunal in [2021] UKUT 0239 (TCC), on appeal from the First-tier Tribunal (‘FTT’). What was at stake, in practical terms, was liability to Class 4 National Insurance Contributions.
Although it is for most tax purposes treated as if it were a partnership, an LLP is, like a limited company, a body corporate with a legal existence separate from that of its members. Absent any special rule, therefore, it would be no more problematic for an LLP to employ one of its members than for a company to employ one of its shareholders.
But there is a special rule: and therein lies the confusion. Section 4(4) of LLPA2000 says:
A member of a limited liability partnership shall not be regarded for any purpose as employed by the limited liability partnership unless, if he and the other members were partners in a partnership, he would be regarded for that purpose as employed by the partnership.
Unfortunately, that provision raises as many questions as it answers. Read literally, it makes no sense, for ‘if [the member] and the other members were partners in a partnership’, the member could never be regarded as employed by the partnership.
In Tiffin v Lester Aldridge [2012] EWCA Civ35 the Court of Appeal had a stab at making sense of it, saying that:
It requires an assumption that the business of the limited liability partnership has been carried on in partnership by two or more of its members as partners; and, upon that assumption, an inquiry as to whether or not the person whose status is in question would have been one of such partners. If the answer to that inquiry is that he would have been a partner, then he could not have been an employee and so he will not be, nor have been, an employee of the limited liability partnership.
Thus the answer given by that case to the question whether you can be an employee of an LLP of which you are a member is – yes, it’s possible: but whether you are or not depends on the facts.
However, in Clyde & Co LLP v Bates van Winklehof [2014] UKSC 32 the Supreme Court said that Tiffin was wrongly decided:
All that it [s4(4)] is saying is that, whatever the position would be were the LLP members to be partners in a traditional partnership, then that position is the same in an LLP.
There is, however, some dispute as to whether what was said in Clyde & Co was part of the reasoning for the decision (and therefore binding on the lower courts) or merely obiter dictum, leaving Tiffin as good law.
In the Wilson case, the Upper Tribunal declined to add its thoughts to the debate on s4(4). So, on the important question of precisely what the subsection means, we are as much in the dark as we ever were.
Instead, the Upper Tribunal were able to avoid that difficult question by considering whether Mr Wilson would have been an employee under the ‘Tiffin Test’. It was thus necessary to consider whether, if the LLP had been a partnership, Mr Wilson would have been a partner: would he have been carrying on a business in common with the other members of the LLP with a view of profit?
This was a question of fact, albeit one requiring a recognition of the applicable legal principles. The FTT had found that, on the assumption required by Tiffin, Mr Wilson would have been a partner. The Upper Tribunal could find no fault with the FTT’s decision and dismissed Mr Wilson’s appeal.
Wilson dealt with events occurring between 2011 and 31 March 2014. Since 2014 the ‘salaried member’ rules have provided that a member of an LLP will be treated for tax purposes as an employee (and not as a member) if any one or more of three specified conditions are met. It thus seems unlikely (but not impossible) that HMRC would now seek to characterise as an employee a member who does not meet any of those conditions.
Nonetheless the question ‘Is a member of an LLP is capable of being an employee of it?’ may have implications beyond tax law (indeed neither Tiffin nor Clyde were tax cases). Final clarification of that question is long overdue.
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