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News - 21 February 2012

Court Decision on Partnership Dispute

A recent Court of Appeal decision involving a law firm and a former partner clarifies the employment status of fixed share equity partners following a notice from HMRC on share of profits in partnership disputes.

A November 2011 judgement in this case considered the circumstances in which an individual who enters into a members' agreement in a LLP may be considered to be an employee.
 

This dismissed appeal is a useful reminder that although there is often what may appear to be little material difference between fixed-share and salaried partners, relatively minor differences may be determinative of employment status.
Prior to the firm becoming a limited liability partnership, the individual had been a salaried partner and then a fixed share partner.
When it converted the individual concerned signed the members' agreement and made a contribution to capital and received a small share of profits.
 

In 2009 he parted company after failing to establish a sufficient client base to provide work for him and his colleagues.
He brought employment tribunal claims for unfair dismissal, breach of contract and statutory redundancy, and sought to establish that he was an employee of the LLP.
 

The LLP claimed that he was not an employee and therefore the employment tribunal had no jurisdiction to hear his claims.
The tribunal found that he was a partner and not an employee as, amongst other factors, he entered into a membership agreement.
On appeal to the Employment Appeals Tribunal (EAT), the individual argued there were factors that pointed towards him being an employee - he was not involved in management, he received too small a profit share and the fact that the LLP purported to dismiss him by reason of redundancy.
 

The EAT agreed with the tribunal and held that the individual was a member, not an employee, arguing there is no minimum threshold that has to be reached in relation to a person's rights to profit or involvement in management before they can be considered a member.
 

He then appealed to the Court of Appeal, which was dismissed.
 

If you need any help and advice on partnership agreements and the subsequent tax liabilities, contact ABDS to discuss how we can help.

ABDS Chartered Certified Accountants of Southampton.
Tel: 023 8083 6900  E-mail: abds@netaccountants.net

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