Changes to HMRC guidance on salaried member rules

Matthew Spencer, 7 March 2024

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HMRC have recently updated the guidance in their partnership manuals in respect of the Salaried Member Legislation, which could impact many LLPs.

The Salaried Member Legislation

The Salaried Member Legislation treats members of LLPs as employees for tax purposes unless they fail to satisfy at least one of the following three conditions:

(A) Condition A: Disguised Salary – it is reasonable to expect that at least 80% of a member’s profit share is "disguised salary” (essentially fixed and not varied in line with LLP overall profits)

(B) Condition B: Significant Influence – the rights and duties of the member does not yield significant influence over the affairs of the LLP.

(C) Condition C: Capital Contribution - The member's capital contribution is less than 25% of the expected disguised salary.

The updated guidance concerns condition C, in respect of a member’s capital contribution. Many firms have used this condition as a “fall back” option, particularly for junior or fixed share partners, to ensure that PAYE does not need to be applied to their drawings. Such firms have taken comfort that their junior partners fail condition C, as a result of capital contributions in excess of 25% of their fixed profit shares.

HMRC have, however, amended their guidance in a way that may be cause for concern for firms relying on this condition.

What has changed?

HMRC have updated their internal manuals, which provide an insight to how HMRC interprets the legislation. It’s important to note that the legislation has not changed, although there has always been an anti-avoidance provision whereby a Targeted Anti Avoidance Rule (‘TAAR’) kicks in.  The TAAR (in section 863G of ITTOIA 2005) requires that the legislation must be applied disregarding any arrangements that are implemented with a view to ensuring that the salaried members rules do not apply (one of the main purposes).

The original guidance suggested that HMRC would only seek to apply the TAAR in the most uncommercial or artificial circumstances, but the recent changes published suggest that they will be focusing more on Condition C going forward.

The original guidance in the HMRC partnership manual suggested:

‘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.’

The revised manual now reads as follows:

Subject to its main purpose (or a main purpose of any arrangement of which it forms part) not being to secure that the salaried members rules do not apply to the individual (or one or more other individuals), a financing arrangement which results in 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. The fact that the loan is arranged through the LLP does not trigger the TAAR.‘

HMRC also provide the following new example:

This example looks at an arrangement where members can alter their capital contributions in each period to avoid meeting Condition C. 

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 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.  

Our initial view

Whilst the salaried member legislation has not changed, this update to HMRC’s guidance suggests that they intend to look closely at salaried member issues which rely upon condition C, applying a wider view of when the anti-avoidance provisions will apply.

We would therefore encourage firms to review their arrangements and consider how best to ensure that the commercial rationale for the level of capital contributions is adequately documented in order to mitigate the risks of a HMRC challenge. A failure to apply PAYE in these circumstances can be costly with additional NIC costs, penalties and even grossing up in some circumstances.

We suspect that HMRC may particularly wish to challenge firms with tailored capital levels for individual members, especially when these change from year to year in line with their anticipated profit levels.

Of course, firms should also consider whether members can fail to be treated as a salaried member under either of the other conditions as part of their normal planning and risk mitigation processes.

How can we help?

Many firms will be currently reviewing profit sharing and capital positions prior to April 2024, especially if this will also be the start of a new accounting year. It’s a good time to consider the impact of HMRC’s change of stance which, of course, we would be happy to discuss with you. For a confidential conversation, please get in touch with Director Matthew Spencer (