2 Mins
In February 2024, HMRC updated the salaried member guidance following the BlueCrest Capital Management (UK) LLP case.
As most LLPs want their members to be classed as self-employed rather than employees, it is important for firms and members to annually consider if they are still being compliant with the rules to enable this to happen.
Recap
The salaried member rules evaluate the work and payment arrangements of each LLP member against three conditions. As these rules affect the tax treatment of LLP members and help determine whether they should be taxed as employees via PAYE or taxed on a self-employed basis.
The conditions are tested independently of each other and the legislation outlines that there is no requirement that conditions A, B, and C must be tested at the same time. However, we recommend that all conditions are considered regularly, especially in light of HMRC’s revised guidance being published.
Self-Employed vs Employee
If all three conditions are satisfied, the individual is classified as an employee and taxed accordingly under PAYE rules. However, if at least one condition is not fulfilled, the individual is regarded as self-employed and is taxed through the self-assessment system.
Conditions
In summary, the conditions are as follows:
1. Condition A
At least 80% of a member’s share of profit is “disguised salary”. This condition applies to partners who are compensated for their services at a predetermined fixed rate, independent of the firm’s overall profitability, i.e. fixed profit partners.
2. Condition B
The individual does not have significant influence over the affairs of the LLP. This is a difficult condition to consider and what is significant influence will vary between firms. The Blue Crest case highlights the importance of being able to evidence how key business decisions are made and who is responsible for making them. HMRC’s guidance now outlines that merely being able to vote or to express a view is unlikely to constitute significant influence.
3. Condition C
The partner has a capital contribution of less than 25% of the “disguised salary” expected to be paid in the relevant year. Condition C considers whether an individual member has invested a significant amount in the business, indicating a willingness to risk their own equity on its success.
Following the BlueCrest case, HMRC changed their view on the application of the Targeted Anti-Avoidance Rule (TAAR) in relation to Condition C. HMRC may now seek to apply the TAAR to arrangements where a member has increased their capital contribution directly in line with an increased fixed profit share in order to avoid meeting condition C.
Summary
At appropriate intervals, LLPs need to consider arrangements for its member very carefully to avoid a challenge from HMRC. As it is now key to ensure there is no correlation between changes to fixed profit shares and capital contribution.