Back to the drawing board on Salaried Members Rules?

In April 2024 we discussed the current salaried members rules and the most recent update on the Bluecrest case, which is one of the first cases in relation to these rules since they were introduced in 2014.  However, in January 2025 the Court of Appeal reviewed the case and remitted it back to the First-Tier Tribunal (FTT) on the basis it made an error on the interpretation of Condition B (significant influence).

Salaried MemberS Rules

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.

COURT OF APPEAL DECISION

The original FTT and Upper Tribunal (UT) decisions widened the interpretation of significant influence beyond HMRC’s interpretation and guidance.  For those LLPs who were relying on members having significant influence, this was a welcome result although there was always the expectation that this may be temporary, depending on the result of any appeals.

The Court of Appeal handed down judgement in January 2025 and has referred the decision back to the FTT on the basis it has made an error in a point of law.  The Court of Appeal’s view was more broadly aligned with HMRC’s original stance, which narrows the interpretation of significant influence.  In particular, the Court of Appeal found influence is derived from the legally enforceable rights and duties set out in the LLP’s constitution rather than what occurs in practice.  In addition, these duties should be in respect of the LLP as a whole rather than particular areas of the business, with a focus on strategic decision making rather than managing the day to day affairs of the LLP.

What are the NEXT STEPS on salaried members rules?

Permission to appeal has been lodged with the Supreme Court so this case could extend further into 2025 before there is full clarity on Condition B.  Meanwhile, revisiting the LLP agreement to understand the rights and duties of members and ensuring this is formally agreed would be a starting point whilst we wait for the results of any appeals.

CONDITION C AND HMRC GUIDANCE

We expect HMRC to update their guidance on capital contribution top ups, such that provided the contribution is genuine and gives rise to real risk for the LLP member, the top up will count towards the 25% threshold set out in Condition C.

HMRC had published guidance in 2024 which set out that any top up would be disregarded where this was made as a result of increased remuneration.  Topping up capital accounts is common in an LLP structure, particularly as members become more senior in the firm.  Often, the capital requirement is set out in the LLP agreement.

It is expected that the new guidance will also set out that HMRC will consider the application of the capital top up by the LLP to ensure it is genuinely required by the business.

If you have any queries about Salaried Members Rules please do not hesitate to get in contact with Jill Walker, or your usual AAB contact.