Salaried members of limited liability partnerships – what’s changed?
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
3 July 2024
In light of a recent tax case, we look at the special rules for salaried members of limited liability partnerships and the impact of HMRC’s updated guidance in this area.
From 6 April 2014, the government introduced special rules for the treatment of salaries in UK limited liability partnerships (LLPs) formed under the Limited Liability Partnerships Act 2000. These rules don’t apply to general partnerships formed under the Partnership Act 1890 or limited partnerships formed under the Limited Partnerships Act 1907.
These special rules were designed to differentiate regular partners (who share the risk and rewards of operating in business) from those individuals who were legally members of LLPs, but were more akin to employees. As such, the rules can only apply to individual members and wouldn’t apply to companies who are members of the LLP.
There is also a targeted anti-avoidance rule (TAAR) that requires any arrangements designed to avoid the special rules to be disregarded if avoiding these rules was their main purpose.
What were the 2014 changes?
The 2014 changes are set out in Sections 863A to 863G ITTOIA 2005. These outline how the individual members of a LLP will be treated as employees for tax purposes (and their income from the LLP subject to PAYE and Class 1 National Insurance, instead of them being treated as self-employed) where three conditions (known as Conditions A to C) are met.
Condition A (Section 863B ITTOIA 2005) applies where it’s reasonable to expect that at least 80% of the total amount payable by the LLP to the member is in respect of “disguised salary”. This is defined as being either fixed, variable without reference to the profits or losses of the LLP, or not in reality affected by the profits or losses of the LLP.
Condition B (Section 863C ITTOIA 2005) is met where the individual member of the LLP doesn’t have “significant influence” over the operations of the LLP. Unhelpfully, the legislation doesn’t define “significant influence” so the application of Condition B is open to interpretation, which can present practical challenges.
Condition C (Section 863D ITTOA 2005) relates to the capital contribution of the individual in the LLP and applies where this is less than 25% of their disguised salary.
The impact of the BlueCrest case
The tax case of HMRC v BlueCrest Capital Management LLP explored the interpretation of Conditions A and B (but not Condition C). In respect of Condition A, the Upper Tribunal highlighted the importance of any remuneration being linked to the profits or losses of the LLP. To avoid Condition A being in point, it is necessary for there to be no link to the personal performance of the individual member.
The Upper Tribunal did however challenge HMRC’s argument that the individual should have “significant influence” over the LLP’s entire affairs to avoid Condition B being in point. Instead, the Upper Tribunal ruled that “significant influence” over specific areas of the business would be adequate.
New HMRC guidance
Following the BlueCrest case, HMRC has updated its previous guidance that the TAAR would only take effect where there were artificial or contrived arrangements that didn’t reflect the commercial reality of the LLP.
New guidance at PM259200 on becoming a member gives an example of where there may be an arrangement between LLP members so they can alter their capital contributions to avoid meeting Condition C. However, the guidance confirms that the TAAR would apply to such a scenario and that this would mean that Condition C would be met.
HMRC manual PM259310 has also been updated to give a much tighter definition of what is meant by a ‘genuine contribution’ to an LLP by a member. Previous guidance that “a genuine contribution made by the individual to the LLP, intended to be enduring and giving rise to real risk will not trigger the TAAR” has been removed.
This latest guidance indicates that HMRC is looking more closely at the application of the special rules for salaried members of LLPs. Alongside their advisers, LLPs will need to look at the changes closely because individual members who were not previously affected may now find themselves being subject to PAYE and Class 1 National Insurance.
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