USA First UT case on salaried member legislation
The UT has considered whether or not the salaried members legislation applied to a group of LLP members. It upheld an FTT judgment that the legislation requires a member to have significant influence over the affairs of the LLP as a whole, rather than just a part, but found that the legislation applied to some members.
Members of LLPs are generally taxed as self-employed, rather than employees, which can give a significant saving in NICs. The salaried members legislation, introduced in 2014, deems members to be taxable as employees in some circumstances, generally where their work relationship is similar to an employment relationship.
HMRC issued the taxpayer LLP with PAYE and NIC determinations covering five years, on the grounds that some of its members were within the salaried members legislation. In this case, this only applied where at least 80% of remuneration was disguised salary that did not vary with LLP profit, or the members did not have significant influence in the LLP.
The FTT examined the day to day running of the LLP, which had an informal approach to management, with reference to the investment portfolio managers whose tax position was disputed. It found that, contrary to HMRC’s assertion, an individual did not have to demonstrate significant influence over the LLP as a whole, but just over one or more aspects of the affairs of the LLP. This could include financial influence, based on a large capital contribution. It allowed the LLP’s appeal in relation to some members, including the heads of areas in the firm, and those who managed portfolios over a certain size. The others did not have significant influence, and the bonuses paid to all did not vary enough with profit to be anything other than disguised salary.
The UT upheld this decision in full, dismissing an appeal and cross-appeal. The legal tests were applied correctly, and it could not, even if it wanted to, overturn FTT findings of fact.
The judgement has materially widened HMRC’s current interpretation of significant influence beyond just management of the LLP and extends it to include financial and operational influence. It is therefore important to consider whether a firm draws a line of distinction between an appropriately senior level of employee and member, with records maintained to document a member’s significant influence over the financial or operational aspects of the business, so as to not be deemed an employee under the salaried member legislation.
While other factors can influence an individual’s final profit allocation, there needs to be a clear link maintained between the individual’s profit share and overall profit of the firm, with any variable element needing a ‘top down’ approach when considering the test for disguised salary.
For both conditions, it’s important to have clear supporting documentation in place at the outset showing all decisions made, as lack of evidence could be the difference between meeting or failing a condition.
Given the widening of the interpretation of significant influence, this also raises the question as to whether HMRC may look to require LLP members to fail 2 conditions in the future in order to retain self-employment status, which could have a significant impact on professional services firms.
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By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
Tax legislation
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.
