Salaried Member Rules for LLPs

The Salaried Member Rules were introduced in 2014 in an attempt to tackle “disguised employment” through Limited Liability Partnerships (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 First Tier Tribunal decision in BlueCrest Capital Management LLP v HMRC, which was published in 2022, was the first to deal with the Salaried Member Rules. Both BlueCrest and HMRC appealed aspects of the decision to the Upper Tribunal, and the Upper Tribunal’s decision was published in September 2023. The Upper Tribunal confirmed the approach adopted by the First Tier Tribunal and rejected all grounds of appeal. Together, the decisions  make interesting reading and shed important light on the proper interpretation of the Salaried Member Rules.

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, 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, but HMRC’s published view of what this means in practice is focused on influence over the management and strategic direction of the LLP as a whole.

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.

At least one of the conditions must be failed in order for the individual not to be taxed as an employee.

The BlueCrest decision

The BlueCrest case concerned various members of an LLP that provided investment management and back-office services. It was accepted by both the LLP and HMRC that Condition C was met in respect of the relevant members, but there were disputes over Conditions A and B.

As far as Condition A was concerned, 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, and perhaps unsurprisingly, the First Tier 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 Upper Tribunal upheld this decision.

On Condition B, HMRC argued that the individuals did not have the required “significant influence” because this would require them to have managerial influence over the affairs of the LLP as a whole, and they simply did not have this.

The Tribunal considered this condition in light of the sort of influence that would be held by a traditional partner in a traditional professional services firm and concluded:

• Significant influence does not solely relate to managerial influence, but can relate to financial and other influence; a member that plays a significant role in the commercial activities of the LLP, by finding, supervising, and undertaking client work, for example, may well have the required influence by virtue of that role.
• An individual can have significant influence as a result of their influence over an aspect of the LLP’s affairs; it is not necessary for their influence to be over the affairs of the LLP as a whole.

The First Tier Tribunal decided, against HMRC, that at least some of the members in question failed Condition B and were not therefore subject to the Salaried Member Rules. The Upper Tribunal again upheld this decision.

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 meaning of “significant influence”. The prudent approach taken by many LLPs over the years has been to follow HMRC’s published view.

The latest BlueCrest decision has confirmed that the meaning of “significant influence” is broader than HMRC has suggested and, on the basis of this decision, LLPs might now conclude that Condition B is not met in various cases where previously it was thought to have been met.

Ultimately, whether Condition B is met will depend on the facts, and in the event of HMRC enquiry it will remains critical to be able to provide evidence to support any conclusions reached.

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