To most members of an LLP, the answer to this would be a simple yes.
You may be a significant fee earner, maintain complex budgets or contribute substantially to marketing. This enables the business to succeed and demonstrates your influence internally to the firm.
HMRC, on the other hand, will now use the Supreme Court’s decision in BlueCrest Capital Management (UK) LLP v HMRC to decide if there is ‘significant influence’ when applying the Salaried Member Rules.
Salaried Member Rules
The Salaried Member Rules allow HMRC to determine whether an LLP member is truly self-employed rather than trying to disguise employment to benefit their tax position.
If you meet all the following conditions you will be treated as an employee:
- Condition A (Disguised Salary): It is reasonable to expect that at least 80% of the amount payable to the member is fixed or does not vary with the overall profits or losses of the LLP
- Condition B (No Significant Influence): The member does not have significant, managerial influence over the affairs of the LLP as a whole.
- Condition C (Low Capital Contribution): The member’s actual capital contribution to the LLP is less than 25% of the “disguised salary” they are expected to receive in that tax year
So, to be treated as a self-employed taxpayer you must fail one of the conditions above.
Many firms fail condition C by asking their partners to contribute at least 25% of their profit share as capital. In general, this is the easiest and most formulaic of the conditions to fail.
Significant influence
The courts approach in BlueCrest provides updated guidance in what the significant influence detailed in Condition B is.
It is not achieved through being a commercially important individual to the success of the LLP. Instead it should be decided by a close examination of the LLP agreement to establish the main source of a member’s influence.
This is because the relevant influence must derive from an individual’s rights and duties as a member, as opposed to de facto influence existing outside the statutory and contractual framework of the LLP.
What now
In many traditional law firms the partners contribute sufficient levels of capital to fail Condition C. The firm would also likely operate a points-based profit-sharing model by reference to overall profitability of the LLP, which would mean condition A is also failed. BlueCrest therefore has no impact.
If, however, partners are relying on failing condition B, it is important to ensure that significant influence is still being met by ensuring that:
- their rights and duties as a member are clearly set out in the partnership agreement
- the member has real-world influence over the affairs of the entire LLP at the highest level
- The rights and duties are exercised in practice with clear evidence being maintained should HMRC ever require evidence.
As a suitable reminder, it is recommended that partnership structures should be reviewed on a proactive basis and timely basis especially given HMRCs renewed interest in this area of taxation.
If you would like to discuss this further, please get in touch with your usual Hazlewoods contact or alternatively speak to one of the team below.
