UK salaried member rules and LLP managers

In the world of asset management, that includes private equity, venture capital, hedge funds and more, many UK investment managers can find themselves being members in a Limited Liability Partnership (LLP), formed to provide the investment management with advice.

However, navigating the tax landscape in the UK for such LLP members can be tricky, particularly when it comes to the salaried member rules.

Why you should care about the salaried member rules

The salaried member rules can play a crucial role in determining how LLP members are taxed in the UK. Essentially these rules are to assess whether members of LLPs should be considered employees for tax purposes. If the rules apply to the individual LLP member, they will effectively be subject to employment taxes under PAYE and employer’s National Insurance Contributions, rather than being considered self-employed.

Breaking down the salaried member rules

In summary, the salaried member rules operate by requiring the working and remuneration arrangements of each individual member to be considered against the three following broad 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 regarding condition C in particular.

HMRC’s updated guidance

HMRC amended their guidance earlier in 2024 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 uncommon to come across individual members making further capital contributions over time, 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).

If the TAAR applies, 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.

Implications for investment managers

For investment managers structured as an LLP, that has relatively small numbers of members (say, less than 10), then it may be possible to demonstrate each individual member in the LLP has significant influence over the affairs of the LLP (for example, all members are on an executive committee and have a real say over the management of the LLP). If this is the case, then it may be relatively straightforward to fail condition B and therefore the salaried member rules would not apply.

However, for investment managers in larger LLPs, failing condition B for all members becomes increasingly more difficult. It then becomes necessary to consider conditions A and C in detail, which are more of a calculation looking at the ‘disguised salary’ compared to profit shares or capital contribution. Depending on the structure and complexity of the LLP and members rights, there can be a considerable amount of time and effort that needs to go into these calculations.

Furthermore, it is not that uncommon to come across an LLP that will structure the members capital to ensure condition C is failed (and thus the salaried member rules do not apply). LLPs may need to revisit these arrangements as based on the updated guidance, given the possibility of HMRC applying the TAAR.

What should investment managers do?

Investment managers structured as an LLP should review the remuneration and profit share structures for their members and understand the application of the salaried member rules in detail. Understanding the potential implications upfront can also help going forward when expanding and introducing more members to the LLP or changing the structure.

Would you like to know more?

At Blick Rothenberg we have specialists who can review your individual case and provide advice and assistance on the subject of LLPs. If you would like to discuss any of the above, please speak to your usual Blick Rothenberg contact or Mark Eade using the form below.