Skip to main content

Limited Liability Partnerships (LLPs) should be aware that HMRC has issued updated guidance clarifying its approach to the way that salaried members are taxed.

To be clear, the underlying legislation has not changed, but the implication is that LLPs have not been applying the rules correctly and this could mean they face unexpected tax bills in future.

To recap, for members of an LLP to avoid being taxed as employees under PAYE, there is a need to satisfy one or more of three conditions by having:

A) a significant variable profit share,
B) significant influence over the affairs of the LLP, or
C) a substantial capital contribution (at least 25% of annual fixed profit share).

For many LLPs and/or their members conditions A and B can be difficult to achieve, so the focus has been on satisfying condition C.

This is where HMRC’s new guidance is aimed at. It indicates that capital contributions made to maintain the 25% threshold due to an increase in fixed profit share will be disregarded.

HMRC illustrates this in the following (in our view a badly drafted) example:

In 2018, upon joining the ABC LLP, member X contributed capital of £15,000 (this was not part of any arrangement with a main purpose of securing the salaried members rules do not apply and is a genuine contribution).

In 2022 it is expected that X’s remuneration for the next period will consist of £100,000 Disguised Salary, meaning that their contributed capital is below the 25% threshold, and they will meet Condition C.

X contributes a further £10,000 as part of a separate arrangement with the LLP, where members increase their capital contribution periodically in response to their expected disguised salary, in order to avoid meeting Condition C.

This arrangement will trigger the targeted anti-avoidance rule (TAAR) and no regard can be given to the £10,000 when considering whether X meets Condition C. As such X will meet Condition C as their contributed capital remains at only £15,000.

In other words, HMRC is seeking to argue that unless there is some other commercial reason for a member to increase their capital contribution, it will take the view that this has been done with the sole purpose of avoiding the application of the salaried members rules and should therefore be ignored.

While this is just HMRC guidance and given that, amongst others, it applies to firms of solicitors who are often constituted as LLPs, we expect there to be robust legal challenges if and when HMRC tries to implement it.

However, we urge all LLPs to work with their tax advisers to regularly review the processes and procedures they have in place to stay compliant with the salaried member rules. The cost and time taken to conduct such reviews will far outweigh the time and cost arguing against potential tax, interest and penalties that a firm could face if challenged by HMRC.

Should you have any questions or wish to discuss this matter further, please contact Matt Reid, Business Tax Director.

McBrides Chartered Accountants