Salaried Member Rules for LLPs: February 2025 update

Recent developments (both case law and guidance) have cast some light on how the Salaried Member Rules for LLPs (‘The Rules’) should be interpreted. In particular, we are aware of correspondence within the last month between HMRC and The Chartered Institute of Taxation (CIOT) which will be of interest to members of Limited Liability Partnerships (LLPs). Some uncertainty remains, but now is a good time for LLPs to re-evaluate their position and ensure that they understand the implications of the changes.

The Rules were introduced in 2014 in an attempt to tackle “disguised employment” through LLPs. The rules are intended to ensure that members of LLPs, who provide their services on terms more like those of employees than partners in a partnership, are treated as employees for tax purposes.

The Salaried Member Rules for LLPs

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, at the “relevant time”, it is reasonable to expect that at least 80% of the amount payable to the individual during the “relevant period” for the individual’s services will be “disguised salary”. The legislation defines exactly what is meant by “relevant time” and “relevant period”, but the key point is that the test is a forward-looking one, based on reasonable expectation. Amounts are “disguised salary” if they are fixed, or if they are 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. “Significant influence” is not defined, although the recent Court of Appeal decision in BlueCrest has set out some key principles.
• 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 profit share deemed as “disguised salary” which it is reasonable to expect the individual will receive in the particular tax year.

At least one of the conditions must be failed in order for the individual not to be taxed as an employee. Below we go on to consider each condition in turn focusing, in particular, on how our understanding of Conditions A and B has developed through the Court of Appeal decision in BlueCrest and how revisions to HMRC guidance affects our understanding of Condition C.

Condition A

Whilst there are several limbs and defined expressions to potentially interrogate in Condition A the most heavily disputed, and what has given rise to concerns for many LLPs, is the definition of “disguised salary”. Fixed remuneration will, of course, fall clearly within the definition of “disguised salary” but there have been questions around amounts which are variable by reference to performance but subject to restrictions, those restrictions being determined by reference to the overall profits of the LLP.

For example, in the case of BlueCrest, the members received three categories of remuneration: priority distributions, discretionary allocations, and income points allocations. The focus of the case was whether the discretionary allocations were “disguised salary”. These amounts were referred to by the individuals as their “bonuses” and were determined with reference to the individuals’ performance. They were subject to abatement depending on the overall results of the LLP as a whole (i.e. a successful member would not be able to receive the calculated amount if, as a result of the performance of other members, the LLP made lower than necessary profits or even losses). On this basis the LLP argued that they were variable with reference to the overall profits or losses of the LLP and so were not “disguised salary”.

Ultimately, the Court of Appeal, agreeing with the First-tier Tribunal and Upper Tribunal decided that the link between these discretionary allocations and the overall position of the LLP was not strong enough to mean that Condition A was not met. The determination of the amounts received by members must be by direct reference to the overall profits of the LLP. It is not sufficient to make amounts variable by reference to other metrics and simply include the overall profits as a secondary contingency.

Condition B

Condition B has been the subject of a number of disputes on the basis that the terms therein are not as well defined and are more subjectively assessed than those found in Conditions A and C. Questions have been raised around what constitutes “significant influence” and what constitutes the “affairs of the LLP” over which that influence must be exercised.

This is where the BlueCrest case has shed the most light. Most notably, the Court of Appeal has taken a narrower view on the meaning of “significant influence” than that taken by either the First-tier Tribunal or Upper Tribunal. Both tribunals had decided that significant influence did not solely relate to managerial influence, but can relate to financial and other influence. According to both tribunals, an individual could have significant influence as a result of their influence over an aspect of the LLP’s affairs; it was not necessary for their influence to be over the affairs of the LLP as a whole. There was also no need for this influence to have a legal basis in either legislation or the LLP agreement. The Court of Appeal, however, took a radically different approach to Condition B, which can be summarised as follows:

• Influence must be assessed by reference to “mutual rights and duties”, being the legal rights and duties of the LLP members. In this case, the LLP agreement contained an entire agreement clause and these legal rights and duties were therefore to be found in the LLP agreement. Both tribunals were therefore, in the Court of Appeal’s view, incorrect in determining that informal influence (i.e. influence not grounded in law) could be taken into account. However, the Court of Appeal did suggest that separate and informal influence held by one party could dilute the significance of any influence from legal rights and duties held by another.
• The influence afforded by the legal rights and duties must be over the general affairs of the LLP and not over a specific part of the LLP’s affairs. The “affairs” of the LLP is wider than, but includes, the business of the LLP so the focus is on “decision-making at a strategic level” rather than the performance of individual or operational duties.

Whilst the Court of Appeal remitted the case back to be reconsidered by the First-tier Tribunal in light of their guidance on Condition B, it remains to be seen whether BlueCrest will seek permission to appeal this case to the Supreme Court. If they do receive permission to appeal, we could see a further reconsideration of Condition B by the UK’s highest ranking court. However, until then, the reasoning of the Court of Appeal on Condition B will dictate the law on its interpretation.

Condition C and anti-avoidance

We have not yet had any substantive litigation on the correct interpretation of Condition C as it was not an issue in dispute in the BlueCrest case. Condition C is, however, relatively prescriptive and it has become common for LLPs to put into place arrangements to ensure that members’ capital in the LLP exceeds, or is equal to, 25% of any “disguised salary” which the members are reasonably expected to receive. This would ensure that arrangements fail Condition C, thereby precluding the application of The Salaried Member Rules.

This type of arrangement, where members make genuine capital contributions, and have that capital at risk in the LLP for an enduring period, was not perceived as falling foul of the anti-avoidance provision which requires us to disregard any arrangements which have the avoidance of The Rules as one of its main purposes.

HMRC’s guidance had, historically, taken the same view in stating that such capital contributions, to the extent that they were genuine, exposed to real risk, and intended to endure, would not fall foul of the anti-avoidance provision despite arrangements specifically being restructured to cause an individual to fail Condition C.

However, a change to that guidance in February 2024 appeared to qualify this, with HMRC seemingly adopting a more aggressive approach to challenging restructuring arrangements of members’ capital contributions designed to avoid the application of The Salaried Member Rules. HMRC have now (in February 2025) confirmed to the CIOT that they will shortly be reversing this change and issuing new guidance. LLPs and their members can take some comfort that HMRC will not take issue with genuine capital contributions which are exposed to real risk and intended to endure even where they are put in place in response to a change in a member’s disguised salary.

It is important to proceed with caution here, however. We know that HMRC guidance does not have force of law and, in fact, the Court of Appeal in BlueCrest did expressly disagree with HMRC’s guidance on Condition B and noted that it was not reflective of the statutory provisions. As such, whilst the HMRC guidance does offer some reassurance, there remains scope for an alternative argument in future.

Conclusions

Many LLPs will have grappled with The Salaried Member Rules since their introduction, and in many cases they will have had to make a judgement on the application of Conditions A to C. The BlueCrest litigation and recent changes to HMRC’s guidance indicates that this remains a developing area and LLPs should ensure that they stay abreast of changes and consider how they may be affected. Given the complexity of the rules, advice should be sought whenever considering the application of The Rules.

If you would like to discuss the application of the Salaried Member Rules for LLPs, particularly in light of recent developments, please get in touch.