As we mentioned in our previous update on this topic, HMRC have performed a U-turn on the guidance they issued in February 2024 regarding the Salaried Members rules. The purpose of these rules is to determine whether LLP members are taxed as employees or on a self-employed basis.
In February 2024, HMRC changed their approach and suggested they would look to challenge arrangements where LLP members ‘topped up’ their capital contributions to the LLP to ensure their contributions remained sufficient for them to be taxed on a self-employed basis, following an increase in their remuneration. One of the tests within the rules (‘Condition C’), is that the member has made a capital contribution to the LLP amounting to at least 25% of their profit share.
Earlier this year, HMRC announced they would revert back to their previous approach, and they have now updated their guidance to reflect this.
In their updated guidance, HMRC state:
a) the policy intention behind the Salaried Member rules is to provide a series of tests that are designed to encapsulate what it means to be a genuine partner operating in a typical partnership; and
b) arrangements put in place with a main purpose of ensuring an LLP member is taxed on a self-employment basis are caught by the ‘Targeted Anti-Avoidance Rule’ (TAAR) and are to be ignored; but
c) genuine long-term structuring that causes an individual to be taxed on a self-employed basis is not considered to be contrary to the policy intention and will not trigger the TAAR.
The example set out in their guidance concerning members who increase their capital contribution has also been amended, and HMRC now make the following important points:
- In applying the tests, HMRC will take into account the policy intention underlying the legislation.
- It will be a question of fact as to whether capital contributions are made as a result of arrangements that trigger the TAAR.
- HMRC accepts that genuine contributions made by an individual to the LLP, intended to be enduring and giving rise to real risk of loss to the individual, will not trigger the TAAR.
- The mere fact that an amount may qualify as a capital contribution within the meaning of the legislation does not mean it is genuine, intended to be enduring and at real risk.
- “Real risk” refers to whether the individual is personally at risk of suffering a financial loss.
- The fact that an LLP is well capitalised and the risk of insolvency is low would not mean that the contribution is not at real risk.
- In addition, if a well capitalised LLP did not require additional capital before the member’s contribution was made, HMRC would not consider that the contribution was not genuine or at real risk, as they recognise that LLPs may put contributions to a variety of commercial uses.
- HMRC will take into account how the capital contribution is used by the LLP when determining whether it is genuine and giving rise to real risk. If the LLP has no intention of making commercial use of the contribution, in particular if it is ring-fenced and not made available to the LLP, in their view that may indicate it is not a genuine capital contribution or at real risk.
HMRC’s U-turn will be welcomed by firms that rely on Condition C, and the updated guidance provides additional clarity on how HMRC expects firms to structure their members’ capital if the contributions are to avoid triggering the TAAR.
If you would like advice on how to structure members’ capital contributions or on the members’ tax affairs generally, please do get in touch.
