HMRC reverses changes: clarity on Condition C for salaried members

On 9 April 2025, HMRC released an update within its Partnership Manual guidance, setting out its interpretation of arrangements that trigger targeted anti-avoidance rules (TAAR) in relation to Condition C of the salaried member rules.

The welcome news is that HMRC’s update reverts back to its original interpretation of the rules, ensuring that “top-up” capital contributions made by individuals to maintain at least 25% of their “disguised salary” as capital will not be caught by TAAR.

Background on salaried member rules

The salaried member rules assess if members of Limited Liability Partnerships (LLPs) are engaged on terms similar to those of employees. If the following three conditions are met, a member is taxed as an employee and should be paid by the LLP after tax and National Insurance Contributions (NICs) are deducted under pay as you earn (PAYE):

• Condition A: it is reasonable to expect that at least 80% of a member’s share of profit is disguised salary (ie it is not varied by reference to the overall amount of the LLP’s profits or losses);
• Condition B: the individual does not have “significant influence” over the affairs of the LLP; and
• Condition C: the individual’s capital contribution is less than 25% of the amount of the disguised salary it is reasonable to expect the member to receive.

HMRC tightens rules on capital contributions under TAAR in 2024

On 21 February 2024, HMRC updated the Partnership Manual to provide examples of when TAAR would apply, clarifying genuine capital contributions.

Of particular concern was the indication that members who increase their capital contributions to ensure they have capital of at least 25% of their disguised salary would be caught by TAAR, meaning that these additional capital contributions would be ignored in the Condition C test.

HMRC reverses guidance in 2025

On 9 April 2025, in response to various representations, HMRC updated its guidance to reverse the changes implemented in February 2024. Top-up contributions made by individuals to ensure they have capital of at least 25% of their disguised salary will not fall under the scope of TAAR, provided that the capital contributions made are genuine, enduring and pose a real risk to the member.

The confirmation that the pre-2024 understanding that top-up contributions are qualifying capital contributions for the Condition C test is welcomed. However, members must ensure that their capital contributions to LLPs are enduring and involve real risk. For example:

• The loan itself is a full recourse loan, and the member is at genuine risk of losing their capital in the event the LLP makes a loss, becomes insolvent or ceases. Note that even if an LLP is well-capitalised, and the risk of insolvency is low, this should not have an impact on deciding whether the capital contribution is at real risk.
• Members must make capital contributions in order to meet the funding requirements of the LLP. These capital contributions must not be held in separate ring-fenced accounts for the benefit of members.
• The individual member must bear the cost of the loan interest. While it is acceptable for the LLP to pay the interest, the loan interest paid must be charged to the member’s current account.

LLPs must continue to record the capital requirements for each partner in the LLP agreement and document their analysis and conclusions, supported by the annual calculations showing whether a member meets or fails one of the three Conditions. If your LLP relies on Condition C, you must complete the analytical review supporting your report at the start of each tax year, upon admitting new partners, if there is a change in the contribution (including the top-up), or if there are changes affecting Condition C.

If you would like to discuss the above further, or would like a review of your annual report, please contact Mark Waddilove or one of RSM’s professional practice specialists.