HMRC has made changes to the provisions that determine the tax status of partners of Limited Liability Partnerships (LLP). While it has caused some concern, the update to the Salaried Member Rules is not a change in legislation – it simply gives insight into HMRC’s interpretation of current legislation and serves as a reminder to LLPs about the guidance they must follow for salaried members.
What are the Salaried Member Rules?
The Salaried Member Rules - which apply only to LLPs and not to partnerships or limited partnerships - look at whether a salaried member/partner should be subject to PAYE or regarded as self-employed, based on three conditions. For tax purposes, a member will be treated as an employee if all three are met.
The three conditions are as follows:
Disguised remuneration - Is the income they received to all intents and purposes a salary i.e. how tied into the final assessable profits is their share? If a loss is made, do they still receive an agreed amount? Is there no impact on take home share, regardless of what has happened in the year?
Significant influence – How much say in business decisions does an individual have? Do they have little to none?
Capital contribution – is a member’s capital contribution less than 25% of the ‘disguised salary’ it would be reasonable to expect them to receive during the tax year?
The updated guidance to the Salaried Member Rules applies to condition C, in which HMRC details that an introduction of capital to ‘top-up’ the members' capital, pre-empting an increase to their share of income from the partnership to ensure they fulfil the 25% criteria, would likely fall under the Targeted Anti Avoidance Rule (TAAR). This may be the case where a member’s fixed salary has increased, perhaps over a number of years, meaning that the capital they have in the business no longer meets the condition to be regarded as self-employed.
However, Condition C requires a minimum of 25% of profit share coupled with a ‘risk of losing the capital’. What HMRC is looking for in relation to capital is that such a contribution is required by the business and has a permanence to it and, it is not simply contributed to satisfy a test for tax purposes. Therefore, even without the recent clarification from HMRC, it would be likely that such a top-up would mean the 25% test in condition C is met. HMRC also re-emphasised the need that true capital in an LLP must have the potential to be ‘at risk’.
Guidance for LLPs
The clarification around the Salaried Member Rules was part of a recent HMRC manual update, and could be an indicator as to a specific area HMRC may be looking to focus on with future compliance reviews. While it has caused some concern, the update only ratifies what LLPs should already be doing.
If you operate your business as an LLP it is important to regularly review your agreements and ensure you are correctly applying the provisions set out by HMRC. Agreements should detail how members will be remunerated, the level of involvement they have and the required capital contribution. It is normal to have different criteria dependent on levels of member, for example, fixed profit share or full equity. It is also important to be mindful of any changes when an individual progresses through the LLP to ensure that any additional capital, if required, is injected at the correct time point, ensuring that capital requirements are kept under review, especially in the current environment of higher interest charges and added difficulty in securing partnership capital loans.
If you would like advice and support about the salaried members rules, please call 0808 144 5575 or email help@armstrongwatson.co.uk.
