In February 2024, HMRC issued updated guidance on the salaried member rules that could significantly impact the employment status of fixed-share members in LLPs. This guidance has been updated recently to clarify some aspects – we explain more and how this could affect your LLP in our latest blog…
What are the salaried member rules?
Under the salaried member rules, LLP members are treated as employees for tax purposes unless they fail one or more of the following three conditions:
- Condition A – the individual receives a fixed share of profits
- Condition B – the individual does not have significant influence over the LLP’s affairs
- Condition C – the individual has contributed less than 25% of their expected profit share as fixed capital to the LLP
If a member fails one or more of these conditions, they are taxed on a self-employed basis. Since these rules were introduced over a decade ago, many LLPs have required their fixed-share members to contribute enough capital to meet the 25% threshold under Condition C. This approach is straightforward to measure, offers firms certainty, and has a positive impact on cash flow.
Targeted Anti-Avoidance Rule (TAAR)
The salaried member rules include a Targeted Anti-Avoidance Rule (TAAR) which applies when actions are taken with the main aim of avoiding employment taxation for LLP members. When the rules were first introduced in 2014, HMRC recognised that many firms may restructure to ensure their members failed one or more of the conditions, especially Condition C.
At the time, HMRC’s guidance stated that genuine long-term restructuring – such as making a real capital contribution to the LLP – would not be considered a violation of the rules as long as the contribution was enduring and posed a real financial risk to the individual.
What’s changed in HMRC’s guidance?
HMRC has ‘clarified’ how the TAAR applies to Condition C. Although the previous statements regarding genuine capital contributions remain, HMRC has now added a crucial caveat: “even if the contribution is genuine and poses real financial risk, it will be disregarded if the main purpose, or one of the main purposes, is to avoid the member being taxed as an employee.”
Additionally, a new example has been included in the guidance suggesting that HMRC may apply the TAAR where there is a separate agreement between the member and the LLP, allowing the member to periodically increase their capital contribution in line with profit share increases, ensuring Condition C continues to be failed. This signals that HMRC is closely scrutinising arrangements designed to fail Condition C and avoid salaried member status.
What should firms do now?
The updated guidance has prompted many LLPs to review their current arrangements to ensure they comply with the new interpretation. Firms that do not meet the new criteria may want to consider whether their fixed-share members should be paid through payroll moving forward. Alternatively, firms may explore relying on Conditions A or B, rather than Condition C, to achieve self-employed tax status for members.
Get in touch
In light of these changes, it’s important for LLPs to reassess their strategies and make any necessary adjustments to avoid potential scrutiny from HMRC. If you’re uncertain how these updates might affect your firm’s tax position, get in touch by emailing enquiries@pmm.co.uk.