Understanding the changes to the Salaried Member legislation

Guidance has changed for Limited Liability Partnerships (LLPs) and their members under the Salaried Member legislation.

Whilst the legislation has not changed, HM Revenue & Customs (HMRC) has amended the guidance on how it should be interpreted.

What is the Salaried Member legislation?

Under the Salaried Member legislation, LLP members can be treated as employees for tax purposes if they do not meet the criteria below.

The three conditions are:

Condition A – This condition focusses on a disguised salary, where at least 80 per cent of a member’s profit share resembles a fixed salary instead of a variable share linked to profits.
Condition B – This looks at what the members’ rights and duties are within the LLP and how significant their influence is.
Condition C – This assesses whether the members’ capital contribution to the LLP falls below 25 per cent of their expected disguised salary.

These benchmarks can determine the tax status of LLP members.

What is HMRC’s new guidance?

The updates to HMRC’s guidance are in line with the Targeted Anti Avoidance Rule (TAAR) which aims to crack down on LLP members avoiding being taxed as an employee.

Originally, the guidance implied that HMRC would only invoke the TAAR in extreme cases. However, the updates present that HMRC will be taking a more vigilant approach targeted at Condition C.

A new clause has been introduced that specifies that financing arrangements designed to avoid the Salaried Member rules may trigger the TAAR, and LLP members may face different tax obligations.

In response, LLPs and their members must structure capital contributions and arrangements carefully.