HMRC showing renewed interest in the salaried members rules

Have you recently received a letter from HM Revenue & Customs (HMRC) in relation to the salaried member legislation? 

These letters have been sent to remind limited liability partnerships (LLPs) and their members that they must operate PAYE on the partners’ remuneration if they fall within the anti-avoidance legislation. This is still, and will continue to be, an area that comes under scrutiny as HMRC believe many LLPs have members who are engaged on terms like those of employees rather than traditional partners.

What are the salaried member rules?

The salaried member rules will apply in circumstances where a member of an LLP meets all three conditions, and should therefore be treated as an employee by the partnership, resulting in PAYE obligations. 

The three conditions can be summarised as follows:

  • A: it is reasonable to expect that at least 80 per cent of a member’s share of profit is ’disguised salary’;
  • B: the individual does not have ‘significant influence’ over the affairs of the LLP; and
  • C: the individual’s capital contribution is less than 25 per cent of the amount of the disguised salary it is reasonable to expect the member to receive.

Condition A

HMRC define disguised salary as an amount which is: 

  • fixed; 
  • variable, but 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 or losses of the LLP

Condition B

The idea of significant influence is subjective; HMRC will look at the mutual rights and duties of the members and the LLP.

It is worth noting that it is not sufficient to be merely involved in the day-to-day management of the business - HMRC will look at whether the member can and does exert significant influence over the LLP’s business. 

Condition C

Many firms rely on condition C. However, if there are any changes in fixed profit shares, or the introduction of new partners, those partners have 2 months from the change in their fixed profit shares, or from the date of joining the firm, to invest the required capital into the partnership. Failure to do so will result in a requirement for the partnership to deduct tax and NICs, under PAYE, from the partners’ drawings.

Our specialist tax team have been working closely with many financial services organisations to assess their members activities and to review and mitigate any risks identified. An initial assessment is a relatively straightforward project and many of our clients have made minor changes following reviews which have given them comfort that they will not fall foul of the revenue. Contact us for more information on how we can help.

To keep up-to-date with the latest insights and events, please click here