Salaried member review retests

In recent months there has been an increase in HMRC enquiries regarding the salaried member legislation, largely following the first tribunal case concerning these rules, with many outcomes dependent on the evidence presented to HMRC.

Furthermore, HMRC have changed their guidance in respect of the capital contribution, Condition C of a member to the LLP and emphasises that where the main purpose or one of the main purposes of the contribution is to fail Condition C, it will be disregarded for the purposes of this test. Given this change it is important that firms clearly document the reason for the level of capital contributions required by partners.

The deadline for re-testing Condition A (disguised salary test) will be within the next few months for most firms and the relevant dates for Condition C (capital test) are 6 April 2024 as well as the firm’s year-end date.

Any existing member who might need to subscribe additional capital to meet the Condition C test will need to have done so before the test date. There is no period of grace for existing members, unlike for new members who must commit to subscribing their capital when they join and actually subscribe the capital within two months of joining.

The rules

Members of an LLP should be taxed under PAYE as a salaried member unless they fail one of the following tests:

• Condition A: at least 80% of their income is of disguised salary
• Condition B: they do not have significant influence over the affairs of the LLP
• Condition C: their capital is not at least 25% of their disguised salary.

If the answer to at least one of the above tests is 'no', the member should be taxed as a self-employed partner.

Pass all three tests and the individual is a salaried member to be taxed under PAYE, with the burden of Employers NIC due on the total reward of the salaried member along with potential pension auto-enrolment and administration issues for the LLP.

Disguised salary includes any reward for services which is, either, without reference to, or highly unlikely to be affected by, the profits of the LLP. Fixed share members will typically meet this condition.

The recent judicial case has helped clarify that “significant influence” in the context of Condition B need not be limited to managerial influence, and can include influence over financial aspects, or over a specific part of the firm which makes a key contribution to the LLPs business.

Conditions A and C are forward-looking based on reasonable expectation.

Condition A should be tested at the start of the firm’s profit-sharing period, which HMRC expects to be the financial year for most firms. The test looks at the reward each partner expects to earn for the profit-sharing period, and the extent to which it is disguised salary.

Condition C should be tested on 6 April, looking at the reward each partner expects to earn for the year to the following 5 April, and compared with the level of capital subscribed to the firm.

Firms should take care to document their salaried member compliance and retest reviews, so they are available when HMRC checks a firm’s compliance with the legislation.

What other times will you need to retest?

Retests are also required on a variety of other occasions such as:

• when a member joins the firm
• when the firm’s profit share arrangements change
• the management structure changes
• when a member’s status changes.

For more information, or to discuss the application of the salaried member legislation to your firm’s circumstances, get in touch with your usual Crowe contact.