Are The Goalposts On Salaried Member Rules Moving?

Jill Walker, Private Client Partner and author of blog about Salaried Member Rules

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What are salaried member rules?

The salaried member rules for Limited Liability Partnerships (“LLPs”) were introduced in 2014 to ensure only those members who held a genuine ‘partner’ role were taxed as self-employed individuals, such that those with arrangements closer to an employment relationship continued to be taxed via PAYE with the appropriate Employee and Employer National Insurance applied.

Although the rules have been in place for nearly a decade, a recent case Bluecrest Capital Management LLP v HMRC has considered these rules in some detail.  On the back of the judgement in this case, HMRC have updated the guidance in their manuals which suggest they have changed their stance on capital contributions. This has implications for those LLPs with members earning a fixed profit share.

What are the salaried member rules Conditions?

For the salaried member rules to apply, whereby an individual member would be treated as being employed by the LLP rather than as a traditional self-employed partner, there are three statutory conditions which must be met:

  • Condition A: It is reasonable to expect that at least 80% of an individual member’s share of profit is ‘disguised salary’. A disguised salary is effectively a fixed salary, or one that is not influenced by the LLP’s profits and losses.
  • Condition B: The duties and the rights of the individual member do not give ‘significant influence’ over the affairs of the LLP. ‘Significant influence’ is not defined by statute, and it will come down to HMRC’s discretion to look at the duties and rights of the individual member when determining if the member exerts significant influence over the LLP.
  • Condition C: The capital contribution from the individual member is less than 25% of the ‘disguised salary’ that the individual will reasonably expect to receive within the relevant tax year.

All three conditions must be met in order to be treated as an employee for tax purposes and therefore ‘failing’ one condition allows a member to continue to be taxed as a self-employed individual. Most commonly, members were asked to contribute capital so that Condition C was not satisfied.  HMRC’s previous guidance suggested that where a capital contribution was made that carried a real risk and was enduring to the LLP, the salaried member rules would not apply.

Significant changes TO HMRC guidance of Salaried Member Rules

HMRC have now updated their guidance to remove reference to the fact that a genuine capital contribution would not trigger the application of these rules.

In addition, HMRC have made it clear that the rules apply where arrangements are made to increase capital contributions where disguised salary increases, to maintain the 25% threshold.  An example of how HMRC will treat this is set out in the Partnership Manual (PM259200).

What can we LEARN from the Bluecrest Case?

The specifics of the Bluecrest case considered ‘disguised salary’ and significant influence i.e. Conditions A and B. In terms of disguised remuneration, no specific test was set by the Upper Tribunal, but it was agreed that remuneration must be linked to the overall profits of the LLP and could not relate only to personal performance.

What is important to take away from the case is that the Upper Tribunal agreed there is no ‘one size fits all’ approach to significant influence and it is particular to the nature of the business being run by the LLP.  HMRC’s view that an individual needed to have significant influence over all of the LLP’s affairs was deemed unrealistic. The Upper Tribunal agreed that significant influence over specific areas of the business could be sufficient.  This influence also did not have to be financial; it was acknowledged that wider roles in the business could give rise to significant influence.

CHANGE OF GUIDANCE ON CONDITION C

The change of guidance on Condition C will cause concern and raise questions about what steps can be taken to fall outside the Conditions set in the legislation.  It would seem that HMRC will need to rely on this interpretation to enforce the salaried member’s rules, particularly as the Bluecrest case has highlighted that significant influence is not as widely drawn as HMRC initially contended.

LLPS must consider the rules and the application to their business and partnership structure to identify whether they are at risk of the salaried member’s rules being enforced.

If you have any queries about salaried member rules or any of the changes from the Bluecrest case, please do not hesitate to get in contact with Jill Walker, or your usual AAB contact.

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