Spotlight on LLPs and disguised remuneration arrangements

HMRC have drawn attention to an avoidance scheme which purports to use limited liability partnerships to disguise employment income. Spotlight 66 Limited Liability Partnerships arrangements used to disguise employment income highlights a tax avoidance scheme known as ‘The Partnership Model’ designed to avoid payment of corporation tax by the company and the deduction of PAYE and NICs from payments made to its employees. HMRC consider the scheme ineffective and advise that payments to employees should be treated as taxable employment income in the usual way.

The arrangements operate via a series of steps involving an employee signing an agreement to end or vary their contract of employment in return for a compensation payment. The contract is then terminated or varied but the compensation payment is treated as a capital contribution to an LLP of which the employee has become a partner. Rather than receiving the...