HMRC’s changes to salaried member rules for LLPs

Introduced in 2014, the salaried member rules apply to members of limited liability partnerships (LLPs) who for tax purposes are considered to be employees and therefore subject to employment taxes under PAYE and employer’s National Insurance Contributions, rather than as self-employed.

What are the rules?

To be treated an employee under these rules, an individual who is a member of an LLP must meet three conditions:

1. Condition A is met if it’s reasonable to expect that at least 80% of the total amount payable by the LLP, in respect of an individual’s performance, will be “disguised salary” ie broadly, is fixed or not varied/affected by the overall profits of the LLP.
2. Condition B is met if an individual doesn’t have “significant influence” over the affairs of the LLP. This is arguably the least clear of the three to determine, as there is no simple calculation that gives the ‘right’ answer.
3. Condition C is met if an individual’s capital contribution to the LLP is less than 25% of their disguised salary.

Broadly, therefore, these conditions consider income, influence over the LLP and capital, and use these as measures of whether a member is self-employed or an employee. To be treated as self-employed, an individual needs to fail at least one of the 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.”

In practice, at the time the rules were introduced and since, people have relied on the guidance issued by HMRC before the rules came into effect and the examples included in this guidance.

HMRC v BlueCrest case

HMRC v BlueCrest Capital Management (UK) LLP (an Upper Tier Tax Tribunal decision from September 2023) dealt with the application of two of the three conditions (A and B, but not C). BlueCrest was a partial win for both HMRC and the taxpayer. A lot of its focus was on what “significant influence” in Condition B meant. There was also some discussion of the way in which BlueCrest allocated profits and whether this was sufficient to fail Condition A (so that members would be treated as self-employed). Unhelpfully, the First Tier Tribunal (FTT) judge said that, had he had to decide the point, he would have held that the TAAR applied to BlueCrest’s attempt to fail Condition A.

This is obiter dicta, but the concern is that this may not deter HMRC from using it in subsequent cases, especially bearing in mind that the decisions of the FTT do not create binding precedent.

Update to HMRC guidance

On 21 February, without explaining what had prompted the amendments, HMRC made changes to its guidance. Summarised as follows:

Anti-avoidance: genuine finance

Edited PM259310. Change clarifies that even if an arrangement results in a genuine contribution by the individual to the LLP if there is a main purpose of securing the salaried members rules do not apply, then the TAAR can still be triggered.

Becoming a member

Example added to show how the legislation applies to arrangements where members alter their capital contributions in order to ensure they don’t meet Condition C.

HMRC’s new example

Most concerning is the new example HMRC gives:

This example looks at an arrangement where members can alter their capital contributions in each period to avoid meeting Condition C.

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

As HMRC hasn’t explained why it has changed its guidance, it isn’t at this stage clear exactly what this change means.

The concern is that it signals a change of approach. When the rules were first introduced, most people treated Conditions A and C as an arithmetic test. Especially in the context of Condition C, this was encouraged by comments from HMRC that where a member of an LLP had enduring “genuine” at-risk capital in an LLP, this would be accepted in determining if Condition C is failed.

However, the latest example makes no mention of whether the £10,000 capital is enduring or gives rise to real risk, so the question is, what has changed? The answer remains unclear.

How we can help

If you’d like to discuss these latest changes from HMRC and how the salaried member rules apply to your LLP, please get in touch with Mike Hodges.