HM Revenue & Customs (“HMRC”) updated its published guidance in respect of the Salaried Members rules earlier this year.

The Salaried Members rules apply to UK Limited Liability Partnerships (“LLPs”) formed under the Limited Liability Partnership Act 2000. An individual member of a trading LLP is generally taxed as if they were carrying on a trade directly for income tax purposes (i.e. as a self-employed trader).  This treatment carries certain tax advantages compared to the treatment of employees (for example, PAYE does not apply and tax is generally payable twice yearly, rather than monthly). 

The Salaried Members rules are designed to target LLPs who may have individual members engaged on terms closer to those of employees and can categorise those individuals as “salaried members”, meaning that they are treated as an employee for Income Tax and National Insurance Contributions purposes. Where these rules apply businesses will suffer the significant cost of Employer’s National Insurance Contributions, noting that the current rate of Employers National Insurance being 13.8% of the remuneration paid to the individual. As you will appreciate, in relevant cases this cost could have a significant financial impact on a business.

In order for an individual member of an LLP to be treated as a self-employed trader, rather than an employee, for UK tax purposes, the individual must fail at least one of three conditions - Condition A, Condition B and Condition C - in the rules.

An individual member of an LLP will fail Condition C only if their capital contribution to the LLP is more than 25% of the amount of the “disguised salary” - broadly, a fixed amount or a variable amount which does not vary with reference to the overall amount of the profits or losses of the LLP - that the member is expected to receive in respect of their performance during the tax year. 

HMRC have made two updates to their guidance which could apply to the situation where an individual member of an LLP makes an additional capital contribution to the LLP with the main purpose of failing Condition C.

A new example has been included in HMRC’s guidance, that outlines that a Targeted Anti-avoidance Rule will apply to the situation where an individual member of an LLP increases their capital contribution to the LLP as a response to a change in their “disguised salary” in order to fail Condition C.

Under the example, the additional capital contribution would be ignored for the purposes of the Salaried Members rules.

Whilst this is a technical matter, any LLP capital changes for existing or new partners should be considered carefully to ensure that the partner is not treated as an employee.

Get in touch

For more information or if you have any queries, don't hesitate to get in touch with me, Alex Docherty, Ricky Murray, Stephen Quinn or Roger Campbell.