HMRC has recently been taking aggressive action to clamp down on “disguised employment” arrangements that avoid the payment of employer/employee National Insurance Contributions (NICs). HMRC has focused on Fixed Share partnership arrangements and legislation will come into force in April this year introducing new conditions that all partners in Limited Liability Partnerships (“LLPs”) must satisfy, or be taxed as employees.
Whilst most GP practices operate as traditional partnerships governed by the Partnership Act 1890 and not as LLPs, it is likely that all Fixed Share Partnership arrangements will be subject to increased scrutiny from the Revenue.
If HMRC deem the Fixed Share partnership arrangement to be disguised employment then the partnership could be liable for all PAYE and NI that should have been paid on the individual’s income for a period of up to 6 years, and without being able to offset any income tax and NI that has already been paid by the individual. In addition, penalties will be imposed of up to 100% of the tax due. For a highly paid GP the total liability could easily amount to 4 years gross ‘fixed share’.
GP Partnerships and Fixed Share Partners
It is reasonably common for GP Partnerships to engage Partners on a fixed share basis, whether in respect of new partners, prior to them being granted full equity partnership, or as an alternative to staff being engaged as employees. Tax and NI savings and avoidance of the BMA model employment contract are often factors in this decision.
Partners engaged on a fixed share basis are not intended to have all the rights, risks and responsibilities associated with being full equity Partners. There is then the risk that the terms upon which they are engaged are less characteristic of partnership status and more indicative of an employment relationship.
The defining characteristic of a “fixed share” partnership is that at least the greater part of the partner’s remuneration is fixed and essentially guaranteed. Of itself, fixed remuneration points towards employment status and against the element of economic risk-taking that is an intrinsic part of being a partner.
Unfortunately there is no clear legal boundary between employment and partnership, so every case must be decided on its merits. Although fixed remuneration is strongly indicative of employment, it is not determinative and other relevant factors are taken account.
The new legislation provides that a partner in an LLP will be taxed as an employee unless:
Whilst the new rules only apply to LLPs, it seems quite possible that HMRC could see this as a new ‘bar’ against which to measure the fixed share arrangements in ordinary 1890 partnerships as well.
Managing the Risk
Partnerships which include fixed share partners would be well advised to re-examine their arrangements now to reduce the risk that HMRC will take an interest. Important aspects to consider include:
Ensuring an adequate level of provision is a matter of judgement, but GP Partnerships should certainly be very wary of entering into fixed share arrangements where the primary motivation is to avoid creating an employment relationship. If you are in any doubt about which side of the line your current arrangements are on, you should seek professional guidance.
Tags: Fixed Share Partnership