In Charles Tyrwhitt LLP v HMRC [2020] TC7756, the First Tier Tribunal (FTT) held that bonus payments received after becoming a member of an LLP were not self-employment income. The bonuses were paid in respect of their earlier employment by the LLP and were taxable as earnings.
A member of a Limited Liability Partnership (LLP) is treated as self-employed for tax and subject to both Class 2 and Class 4 National Insurance contributions (NICs).
Earnings are received at the earlier of:
- The time at which payment is made.
- The time when a person becomes entitled to payment.
Charles Tyrwhitt LLP (CT LLP), a retailer of shirts and other items of clothing, operated as an LLP.
- In 2012 five employees of CT LLP became members of the partnership.
- In 2013 they received bonus payments under a Long Term Incentive Plan (LTIP) which they had joined in 2010 when they were still employees.
- The bonuses were calculated based on results achieved whilst they remained employees. Entitlement to the bonuses did not crystallise until after the individuals became LLP members.
- CT LLP initially processed the bonuses through the payroll, paying the PAYE and NIC to HMRC accordingly. After taking advice, they made a repayment claim on the basis that the payments were self-employed earnings.
- Following enquiry and a review, HMRC refused the repayment request asserting that the payments were deferred remuneration from the individuals’ employment and that Class 1 primary and secondary NICs were due.
The FTT dismissed the appeal:
- The source of the payment was the individuals’ employment, not their position as LLP members and the contractual entitlement to the bonus came from the LTIP agreement which was part of their terms of employment.
- If the individuals had not become LLP members but had instead received the bonuses after leaving employment, as good leavers or whilst still employed, the payments would have been additional remuneration for their employment.
- The fact that they had ceased to be employed earners by the time the bonuses were paid was not an obstacle to Class 1 NICs being payable as the amounts were paid in respect of their employment.
The employment status of partners has raised issues in the past as the conventional Employment status tests do not mix too well with many partnerships. The FTT judge here pointed out that the whole issue could have been avoided if matters had been simplified when the five employees became LLP members. What they could, and perhaps should have done, was agree that the employees would surrender their contractual rights to the prospective LTIP bonus in return for equivalent fixed amounts of additional profit share, which would have been taxable as self-employment income.
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Employment status: Partners
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Partnerships: Rolling update
A subscriber guide to the taxation of partnerships and the changes affecting them in recent years.
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