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HMRC updates guidance around Salaried Member Rules

Mark Eade discusses the HMRC updates guidance around Salaried Member Rules and why it’s relevant

Why is it relevant?

The salaried member rules are a set of Income Tax provisions to assess whether members of Limited Liability Partnerships (LLPs) should be considered employees for tax purposes. If the rules apply to the member, they will effectively be subject to employment taxes under PAYE and employer’s National Insurance Contributions, rather than considered self-employed.

For background, the salaried member rules operate by requiring the working and remuneration arrangements of each individual member to be considered against the three following conditions:

  • Condition A – It is reasonable to expect that at least 80% of a member’s share of profit is ‘disguised salary’, broadly being fixed or not variable by reference to overall LLP profits.
  • Condition B – The individual does not have ‘significant influence’ over the affairs of the LLP.
  • Condition C – The individual’s capital contribution is less than 25% of the amount of the ‘disguised salary’ it is reasonable to expect the member to receive during the relevant tax year.

To be treated as self-employed, an individual needs to fail at least one of the above conditions.

Since they were introduced, the rules have included a targeted anti-avoidance rule (TAAR) that ‘no regard is to be had to any arrangements the main purpose, or one of the main purposes, of which is to secure that [the salaried members rules do] not apply’.

There has been a number of HMRC challenges over recent years against the status of individual LLP members, and in particular, there was a case addressing this matter – HMRC v BlueCrest Capital Management (UK) LLP (Upper Tier Tax Tribunal September 2023). This has all led to HMRC updating their guidance around the application of the TAAR with regard to condition C in particular.

Who does it affect?

The updated guidance can potentially impact any individual LLP member when regularly changing their capital contribution.

What do you need to know?

On 21 February 2024, HMRC amended their published guidance in relation to capital contributions. A new example was added which states that the TAAR may apply where a member genuinely changes their capital contributions with the main purpose of ensuring Condition C is not met.

It is not that uncommon to come across members making further capital contributions throughout the year, potentially as part of historic arrangements put in place with the LLP, to ensure they meet the 25% threshold and essentially ensuring condition C is failed (and therefore the salaried member rules do not apply).

LLPs may need to revisit these arrangements as based on the updated guidance. We will await to see how HMRC will view and implement the changes in practice, though it seems possible that HMRC may take the view that situations involving additional contributions may trigger the TAAR.

If the TAAR does apply, this would mean that the additional contributions would be ignored in assessing the capital contribution percentage and the member would meet condition C, and therefore be treated as an employee for tax purposes provided that the individual also meets conditions A and B.

What should you do next?

LLPs should review their salaried member position given the amended guidance from HMRC, especially if further capital contributions are made periodically to avoid meeting condition C.

Contact us

If you would like to discuss the above matter, or to confirm how this impacts your LLP, please get in touch with your usual Blick Rothenberg contact, or Mark Eade using the form below.

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