HMRC tightens salaried member rules for LLPs

28 March 2024

The salaried member rules were introduced in 2014 to prevent individuals who are members of a limited liability partnership (LLP) from avoiding employment taxes by claiming to be self-employed. These rules apply to any LLP that carries on a trade or profession with a view to profit. If an individual member meets certain conditions, they are treated as an employee of the LLP for tax purposes and are subject to income tax and National Insurance contributions (NICs) accordingly.

How does HMRC determine if a member is a salaried member?

HMRC uses three conditions to identify salaried members.

  • Condition A: The member receives at least 80% of their remuneration in the form of a fixed or variable salary that does not depend on the overall profits or losses of the LLP.
  • Condition B: The member does not have significant influence over the affairs of the LLP, such as being involved in strategic or management decisions.
  • Condition C: The member's capital contribution to the LLP is less than 25% of their expected salary for the tax year.

If a member meets all three conditions, they are treated as a salaried member. If they meet only one or two conditions, they are not.

What is the Targeted Anti-Avoidance Rule (TAAR) and how has it changed?

The TAAR is a provision that allows HMRC to disregard any arrangements designed to avoid the application of the salaried member rules. For example, if a member makes a capital contribution to the LLP with the sole purpose of failing Condition C, HMRC can ignore that contribution and treat the member as a salaried member.

Until recently, HMRC's guidance indicated that the TAAR would only apply to artificial or contrived arrangements that did not reflect the commercial reality of the LLP. However, HMRC has now updated its guidance to state that the TAAR will also apply to genuine capital contributions made with the sole purpose of avoiding the salaried member rules. This means that HMRC will look more closely at the timing, amount, and source of any capital contributions made by members who rely on Condition C to avoid being treated as salaried members.

What should LLPs and their members do to comply with the rules?

LLPs and their members should review their current arrangements and ensure they comply with the salaried member rules and the TAAR. They should also maintain adequate records and documentation to support their position and demonstrate the commercial rationale for any capital contributions. If members are unsure about their status or the implications of the TAAR, they should seek professional advice from a tax specialist. Our professional services team can help LLPs and their members to understand and comply with the rules and to minimise their tax exposure.

For more information, please contact Mark Waddilove or your usual RSM contact.

Mark Waddilove
Mark Waddilove
Partner, Head of Professional Services
Mark Waddilove
Mark Waddilove
Partner, Head of Professional Services