Salaried Member Rules for LLPs – significant change in HMRC guidance

12 March 2024 / Insight posted in Article

The Salaried Member Rules were introduced in 2014 with the aim of ensuring that members of LLPs who provide their services on terms more like those of employees than of partners in a partnership are treated as if they were employees for tax purposes.

The rules contain a Targeted Anti-Avoidance Rule (“TAAR”) under which certain arrangements must be ignored when determining whether the rules apply. HMRC has recently made a significant change to its guidance on this TAAR, and this change could have an effect on how they view arrangements put in place by many professional services (and other) LLPs.

The Rules

The Salaried Member Rules contain three conditions (A, B, and C) that need to be considered in respect of a member of an LLP. If these are all met, the individual is treated as an employee for tax purposes, with amounts paid to the individual being subject to PAYE and NICs in the usual way.

Condition A is met if it is reasonable to expect, looking forward over the “relevant period” as defined in the legislation, that at least 80% of the amount payable to the individual for their services will be “disguised salary” (essentially amounts that are fixed, or variable by reference to something other than the overall profits or losses of the LLP).

Condition B is met if the individual does not have “significant influence” over the affairs of the LLP.

Condition C relates to the amount of the individual’s capital within the LLP, and the condition is met if this is less than 25% of the “disguised salary” which it is reasonable to expect the individual will receive in the particular tax year.

The TAAR referred to above states that, when considering whether each of the conditions is met, no regard should be had to arrangements where the main purpose, or one of the main purposes, of the arrangements is to ensure that the Salaried Member Rules do not apply.

HMRC’s guidance

HMRC’s guidance states that, when considering the TAAR, they will “take into account the policy intention underlying the legislation, which is to provide a series of tests that collectively encapsulate what it means to be operating in a typical partnership”.

In applying this approach to Condition C, HMRC previously said that “a genuine contribution made by the individual to the LLP, intended to be enduring and giving rise to real risk will not trigger the TAAR”. These comments were generally considered sensible and reasonable, and they meant that where members genuinely contributed a sufficient amount of real capital to the LLP (i.e. they were truly exhibiting that particular characteristic of a partner in a typical partnership) they could be confident of failing Condition C.

HMRC has now qualified its comments on Condition C, and it has introduced the following new example:

In 2018, upon joining the ABC LLP, member X contributed capital of £15,000 (this was not part of any arrangement with a main purpose of securing the salaried members rules do not apply and is a genuine contribution).

In 2022 it is expected that X’s remuneration for the next period will consist of £100,000 Disguised Salary, meaning that their contributed capital is below the 25% threshold, and they will meet Condition C.

X contributes a further £10,000 as part of a separate arrangement with the LLP, where members increase their capital contribution periodically in response to their expected disguised salary, in order to avoid meeting Condition C.

This arrangement will trigger the TAAR and no regard can be given to the £10,000 when considering whether X meets Condition C. As such X will meet Condition C as their contributed capital remains at only £15,000.

What this means

Since the introduction of the Salaried Member Rules, many LLPs have taken comfort from HMRC’s stated position that, where an individual has real, permanent, at-risk, capital in an LLP, this capital should be taken into account in determining whether Condition C is met.

The change to HMRC’s guidance shows that it is now looking a lot more closely at the intention behind any arrangement than it was previously, and for many this will mean the risk of HMRC challenge will increase. The fact that arrangements will have real commercial consequences for the individuals concerned may well have a lot less weight than they were thought to have.

If you would like to discuss the implications of HMRC’s change of approach, or the Salaried Member Rules more generally, please get in touch with our professional firms experts.

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