UK LLP members under the spotlight – what could HMRC’s approach to the salaried member rules mean?

On 21 February 2024, HMRC updated its guidance within the partnership manual in relation to the salaried member rules.

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Katie Illman
Published: 08 Mar 2024 Updated: 08 Mar 2024
Budget Business tax Tax

This change in emphasis by HMRC states that where capital is contributed with a main purpose of avoiding the application of the salaried member rules then the amount will be disregarded for the purpose of the rules.

Where UK LLP members have relied on their capital contribution to ensure self-employment status, this change could have significant implications for the individual and the firm. It is also unclear how firms could restructure to ensure these rules do not apply to their members. We are engaging with HMRC to understand the practical implications of this.

As an immediate first step, firms should review their existing testing methodology and supporting documentation. Following this review there may be a number of next steps; including varying compensation arrangements, considering the impact on tax reserving, centralised partner communications, changes to constitutional documents (which might require a vote) and considering any financing implications alongside the impact of basis period reform.

What’s new

HMRC has edited its guidance at PM259310 (Anti-avoidance: genuine finance) and states the “change clarifies that even if an arrangement results in a genuine contribution by the individual to the LLP if there is a main purpose of securing the salaried members rules do not apply then the TAAR can still be triggered.”

Within PM259200 (Becoming a member) an example has been added to “show how the legislation applies to arrangements where members alter their capital contributions in order to ensure they don't meet Condition C.”

The example references where a member increases their capital contribution as a response to a change in their fixed compensation to avoid them passing Condition C.

Why now

Whilst the salaried member legislation has contained the targeted anti-avoidance rule since inception of the rules (s863G ITTOIA 2005), in our experience HMRC has generally not sought to apply this in the context of UK LLPs where members have made capital contributions on an enduring basis and have genuine financial risk.

However, within the judgement of the BlueCrest case (see below) the Judge made the point that as certain steps were taken to ensure members would not be treated as employees, then the TAAR would have applied if the condition had not been met.

BlueCrest – developing case law

In September 2023, the Upper Tier Tribunal released its judgement on the first case on the Salaried Member legislation (BlueCrest Capital Management (UK) LLP v HMRC [2023] UKUT 232 (TCC).

The case sought to determine whether the discretionary allocations were disguised salary and therefore whether Condition A was met. It also considered whether the individuals had significant influence over the LLP and met Condition B.

Whilst the UTT found in HMRC ‘s favour in respect of Condition A, with regard to Condition B the interpretation of significant influence widened extensively. The Judge took the view that significant influence does not need to be over the entire affairs of the LLP and can instead be over one or more aspects - not limited to managerial influence and can include, for instance, financial or operational influence.

It is understood that HMRC is considering grounds to appeal, but in the meantime has been issuing compliance check notices to certain UK LLPs alongside the update in its published guidance.

Recap of the rules

The salaried member rules, introduced in 2014, removed the presumption that a UK LLP member is taxed as a self-employed individual for UK tax purposes and introduced 3 conditions which determined the employment relationship.

In brief, members will be taxed as employees unless

i. 20% or more of their remuneration is variable (Condition A) or,
ii. they have significant influence over the affairs of the LLP (Condition B) or,
iii. their capital within the firm is at least 25% of their fixed remuneration (Condition C).

There are a number of tax consequences where the member is taxed as an employee, but most notably employers’ National Insurance Contributions at a rate (currently) of 13.8% becomes payable.

If you would like to discuss how any of the above could impact your business, please do get in touch with your usual Evelyn Partners contact or the contacts listed.

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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.