Salaried members review: important change in HMRC’s guidance

On 21 February 2024, HMRC Partnership manual was updated in respect of guidance on the salaried members legislation.

The change in the guidance relates to 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.

This is a concerning development for any firm that relies on Condition C in ensuring members are not salaried members, and particularly firms who have previously tailored members capital contributions to fail the test.

The manual previously said:

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 manual has now been changed to read:

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 have also included a 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.

A number of firms in their annual salaried members reviews rely on their partners failing Condition C and the change in the Partnership Manual and its potential impact will need to be considered. As a starting point we would recommend that firms clearly document the reason for the level of capital contributions required by partners.

We anticipate that having bespoke levels of capital for each partner will not be helpful in defending a firms position with regard to HMRC’s new stance on this topic.

Salaried member reviews are in the process of being considered by firms leading up to 5 April and so we will be following up with further insight on the subject.