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Publish Date

May 05, 2022

Salaried Member Rules – HMRC Communications to LLPs

A&M Tax Advisor Update

We are aware of HMRC sending letters to LLPs regarding the salaried member rules. The salaried member rules became effective from 6 April 2014, as anti-avoidance legislation which HMRC are now seeking to review, along with other measures introduced at the same time.

LLPs are “encouraged” in the letters to review their systems to ensure that salaried members are identified correctly. To the extent that the LLP may have failed to operate PAYE / NIC on salaried members, then a reply would be required. In some cases, we have seen HMRC issuing protective Regulation 80 determinations where they wish to collect unpaid income tax via PAYE. Note that the Reg. 80 determinations do not have to be accurate and can be based on HMRC’s best estimate. They do however need to be appealed on a timely basis.

In addition, extra steps are needed to be taken by HMRC with regard to NIC obligations, and we are aware of procedural inaccuracies in some cases. It is therefore advisable to seek professional advice if you receive a notification letter.

We provide an overview of the salaried member rules below including common issues and how A&M can help.

Background to the salaried member rules 

The salaried member rules treat an individual member of an LLP as an “employee” for tax purposes if the following three conditions are all met, which are summarised below:

  • Condition A — Disguised salary

This is met where it is reasonable to expect that at least 80% of the total amount payable by the LLP for the individual’s services as a member of the LLP will be “disguised salary”. An amount is disguised salary if: – it is fixed; or – it is variable, but varied without reference to the overall amount of the profits or losses of the LLP; or – it is not, in practice, affected by the overall profits of the LLP

  • Condition B — Significant influence

This is met if the individual does not have “significant influence” over the affairs of the firm as a whole.

  • Condition C — Capital contributions

This is met if the individual member’s capital contribution to the LLP is less than 25% of the disguised salary expected to be payable to the member in respect of their performance during the tax year.

Therefore, so long as one of these conditions ‘fails,’ the salaried member rules should not apply.

We consider that the conditions are not as easy to fail as it seems – there are restrictions placed on certain conditions’ applications. Also, the rules set out the timing for when tests need to be satisfied including when rules should be retested. The retesting of conditions is important as if an individual becomes a salaried member then PAYE and NIC should be operated.

Common issues 

We have come across a number of common issues related to the salaried member rules, which include the following:

  • Retests are not being undertaken where there is a change in circumstances i.e. member joining or leaving an LLP;
  • Lack of evidence and documentation to support positions taken;
  • Lack of action taken where there is the concern with the rules;
  • Profit shares that are variable being treated as failing Condition A where they vary by some factor unrelated to the profits of the LLP;
  • Reliance on condition A where the LLP’s profits are calculated on a cost-plus basis;
  • Reliance on all partners having a vote on partnership matters as evidence of significant influence, and how realistic this is as the partnership grows;
  • Increase in capital contributions delayed;
  • Variation to remuneration packages agreed at short notice; and
  • Further bonuses i.e. sign-on and guaranteed being offered to LLP members who join later in the tax year.

How A&M can help

It is important to have effective policies, procedures and processes in place to manage and evidence compliance with the salaried member rules. Issues with the rules may arise throughout the year rather than at one point in a year so this should be iterative.

We have worked on many issues faced by clients, where we have helped them put together effective systems in place and in dealing with HMRC’s communications, including notifications, Regulation 80 determinations and s. 8 decisions. Please do get in touch if you need any further help or information.

If you would like to discuss any of the above please feel free to get in touch with your usual A&M point of contact, Daniel ParryLouise JenkinsTracey NortonJordan Brown or Shirley Ly.