The salaried members rules at ITTOIA 2005 ss 863A–863G are anti-avoidance provisions, which tax the partners of an LLP as employees if three conditions are all met. HMRC have recently changed their guidance relating to the interaction of the targeted anti-avoidance rule (‘TAAR’) found in s 863G and one of those statutory conditions. It is, however, questionable whether the new guidance is accurate; and it should be possible in appropriate cases to continue to rely on the historic guidance for longstanding arrangements.
The three statutory conditions are:
Condition A: it is reasonable to expect that at least 80% of an individual member’s total remuneration is ‘disguised salary’ (which does not vary or which varies but without reference to the LLP’s profits);
Condition B: the individual member does not have significant influence over the affairs of the LLP; and
Condition C: the individual member’s capital contribution is less than 25% of the disguised salary that it is reasonable to expect will be payable to him in the relevant tax year.
The TAAR requires – in the manner of many modern TAARs – that any arrangements, which have as their main purpose ensuring that the regime does not apply, must be disregarded.
Historically, HMRC’s guidance on the salaried members rules did not preclude LLPs from requiring capital contributions of 25% or more in order to ensure that Condition C was not in point. In particular, it was generally thought that requiring an individual genuinely to ‘buy in’ to a significant extent, so as to bring that individual in line with the statutory requirement to fail Condition C, was acceptable and would not engage the TAAR. Indeed, previous guidance found in HMRC’s Partnership Manual at PM259310 stipulated that a genuine contribution intended to be enduring and giving rise to real risk would not trigger the TAAR.
On a purposive basis, this made sense: the three tests are designed to catch relationships which are closer to employment than partnership. Buying into the LLP to a significant degree is, of course, a hallmark of a genuine partnership, aligning the interests of the individual and the business.
Last week, however, HMRC amended the Partnership Manual to remove the assurance from PM259310 and to insert, at PM259200, an example suggesting that the TAAR applies where a capital contribution is increased pursuant to an arrangement that allows members to alter their contributions to avoid meeting Condition C.
It is impossible to know what has prompted the change; but, in the recent case of HMRC v BlueCrest Capital Management (UK) LLP [2023] UKUT 232 (TCC), the taxpayer successfully argued that, for Condition B, ‘influence’ was quite distinct from managerial control and that significant influence need not be exerted over the whole of the LLP’s affairs in order for a particular individual to fail the condition. In that context, it seems fair to speculate that HMRC may have changed their stance on the TAAR and Condition C as a response to the BlueCrest decision. Whatever its cause, the change in HMRC’s guidance will be of concern to the many professional services firms and investment management LLPs who have contracted with their members to increase capital contributions to remain outside Condition C.
While the change in guidance will be unwelcome, it should nevertheless be remembered that HMRC’s previous statements will remain relevant to any public law judicial review challenges concerning arrangements put in place before the recent change. It should further be noted that, although the First-tier Tribunal in BlueCrest [2022] UKFTT 204 (TC) applied the TAAR in the context of a single document relating to Condition A, there is no binding authority that it should not be commercially construed, nor any authority at all on the question of how it applies to Condition C. Finally, it may be that many LLPs, which believed they needed to rely on arrangements put in place with an eye to Condition C, can in fact rely instead on Condition B. So there remains cause for cautious optimism on the salaried members rules.
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HMRC’s new salaried members rules guidance
Navigating HMRC’s approach to Condition C.
The salaried members rules at ITTOIA 2005 ss 863A–863G are anti-avoidance provisions, which tax the partners of an LLP as employees if three conditions are all met. HMRC have recently changed their guidance relating to the interaction of the targeted anti-avoidance rule (‘TAAR’) found in s 863G and one of those statutory conditions. It is, however, questionable whether the new guidance is accurate; and it should be possible in appropriate cases to continue to rely on the historic guidance for longstanding arrangements.
The three statutory conditions are:
Condition A: it is reasonable to expect that at least 80% of an individual member’s total remuneration is ‘disguised salary’ (which does not vary or which varies but without reference to the LLP’s profits);
Condition B: the individual member does not have significant influence over the affairs of the LLP; and
Condition C: the individual member’s capital contribution is less than 25% of the disguised salary that it is reasonable to expect will be payable to him in the relevant tax year.
The TAAR requires – in the manner of many modern TAARs – that any arrangements, which have as their main purpose ensuring that the regime does not apply, must be disregarded.
Historically, HMRC’s guidance on the salaried members rules did not preclude LLPs from requiring capital contributions of 25% or more in order to ensure that Condition C was not in point. In particular, it was generally thought that requiring an individual genuinely to ‘buy in’ to a significant extent, so as to bring that individual in line with the statutory requirement to fail Condition C, was acceptable and would not engage the TAAR. Indeed, previous guidance found in HMRC’s Partnership Manual at PM259310 stipulated that a genuine contribution intended to be enduring and giving rise to real risk would not trigger the TAAR.
On a purposive basis, this made sense: the three tests are designed to catch relationships which are closer to employment than partnership. Buying into the LLP to a significant degree is, of course, a hallmark of a genuine partnership, aligning the interests of the individual and the business.
Last week, however, HMRC amended the Partnership Manual to remove the assurance from PM259310 and to insert, at PM259200, an example suggesting that the TAAR applies where a capital contribution is increased pursuant to an arrangement that allows members to alter their contributions to avoid meeting Condition C.
It is impossible to know what has prompted the change; but, in the recent case of HMRC v BlueCrest Capital Management (UK) LLP [2023] UKUT 232 (TCC), the taxpayer successfully argued that, for Condition B, ‘influence’ was quite distinct from managerial control and that significant influence need not be exerted over the whole of the LLP’s affairs in order for a particular individual to fail the condition. In that context, it seems fair to speculate that HMRC may have changed their stance on the TAAR and Condition C as a response to the BlueCrest decision. Whatever its cause, the change in HMRC’s guidance will be of concern to the many professional services firms and investment management LLPs who have contracted with their members to increase capital contributions to remain outside Condition C.
While the change in guidance will be unwelcome, it should nevertheless be remembered that HMRC’s previous statements will remain relevant to any public law judicial review challenges concerning arrangements put in place before the recent change. It should further be noted that, although the First-tier Tribunal in BlueCrest [2022] UKFTT 204 (TC) applied the TAAR in the context of a single document relating to Condition A, there is no binding authority that it should not be commercially construed, nor any authority at all on the question of how it applies to Condition C. Finally, it may be that many LLPs, which believed they needed to rely on arrangements put in place with an eye to Condition C, can in fact rely instead on Condition B. So there remains cause for cautious optimism on the salaried members rules.
