LLPs: HMRC’s new salaried members rules guidance on capital contributions

The rules tax the members of an LLP as employees if three conditions are all met:

• Condition A: it is reasonable to expect that at least 80% of an individual member’s total remuneration is ‘disguised salary’ (which does not vary or which varies but without reference to the LLP’s profits);
• Condition B: the individual member does not have significant influence over the affairs of the LLP; and
• Condition C: the individual member’s capital contribution is less than 25% of the disguised salary that it is reasonable to expect will be payable to him in the relevant tax year.

Failure to meet one or more of these three conditions means that the relevant member will be taxed as self-employed rather than as an employee, which can result in a significant saving of employer’s National Insurance (NI). Alternatively, where salaried members are taxed as employees and their income forms part of the employer’s tax bill, it will also be subject to the Apprenticeship Levy (0.5%), where the employer’s annual total pay bill is £3m or more.

HMRC’s new guidance

HMRC has recently changed its guidance on the interaction of the targeted anti-avoidance rule (TAAR) and Condition C. The TAAR states that any arrangements must be disregarded if those arrangements , ensuring that salaried members rules do not apply.

Until recently, HMRC’s guidance did not preclude LLPs from requiring capital contributions of 25% or more, in order to ensure that Condition C was not applicable. HMRC has, however, amended its Partnership Manual to remove this assurance and to insert an example suggesting that the TAAR applies where a capital contribution is increased with a view to avoid meeting Condition C.

Why the change in stance?

Whilst we can’t be certain, we understand that HMRC’s change of stance was prompted by the recent case of HMRC v BlueCrest Capital Management (UK) LLP. The recent changes to HMRC’s guidance indicates that it is taking a wider view of how and when the TAAR will apply.

The changes to the guidance will be of immediate concern to LLPs and members who have arrangements in place, which apply incremental movements in capital, as these arrangements may now trigger the TAAR. LLPs must ensure they have a robust process in place and assess each member against all three conditions on a regular basis, and at least before the start of each tax year.

However, we must note that the change is only to HMRC’s guidance, not a change to the legislation or case law. HMRC’s guidance will remain relevant to arrangements put in place before the recent change.

How we can help

We can help you review current arrangements to determine if you are compliant with the legislation, to identify if there is a greater risk of HMRC challenge – given its change in guidance – and to mitigate any risks identified.

For more information or to discuss the above, please get in touch with your usual haysmacintyre contact, our Employment Tax team, or our Partnerships Tax team.