The BVCA has been engaging consistently with Government officials regarding the “Salaried Member Rules” (contained in ITTOIA 2005 sections 863A to 863G), which are a set of tests that determine whether members of an LLP are treated as employees or self-employed partners for tax purposes. These anti-avoidance rules, which were introduced in 2014, apply to LLP members where three conditions (A-C) are met. To fall outside the rules and thereby be taxed as self-employed, at least one condition needs to be “failed”.
In overview, the three conditions are:
Condition A – it is reasonable to expect that at least 80% of the total amount payable by the LLP to the member is “disguised salary” (in other words fixed and not determinable by reference to the profits of the LLP).
Condition B – the member does not have significant influence over the affairs of the LLP.
Condition C – the member’s capital contribution to the LLP is less than 25% of their disguised salary.
Regarding Condition C, LLPs had historically taken comfort from HMRC’s guidance, which indicated that “top-up” contributions made with the aim of ensuring compliance with Condition C were acceptable. However, in February 2024, HMRC made an unannounced change to its guidance (extracted below), effectively stating that the practice of making additional “top-up” contributions of capital to the LLP would trigger the targeted anti abuse rule (“TAAR”) and thus was not effective as a means of falling outside of the rules.
Guidance at PM259200 (“Becoming a member”) was updated to include the following example:
‘This example looks at an arrangement where members can alter their capital contributions in each period to avoid meeting Condition C.
In 2018, upon joining the ABC LLP, member X contributed capital of £15,000 (this was not part of any arrangement with a main purpose of securing the salaried members rules do not apply and is a genuine contribution).
In 2022 it is expected that X's remuneration for the next period will consist of £100,000 Disguised Salary, meaning that their contributed capital is below the 25% threshold, and they will meet Condition C.
X contributes a further £10,000 as part of a separate arrangement with the LLP, where members increase their capital contribution periodically in response to their expected disguised salary, in order to avoid meeting Condition C.
This arrangement will trigger the TAAR and no regard can be given to the £10,000 when considering whether X meets Condition C. As such X will meet Condition C as their contributed capital remains at only £15,000.’
Further, guidance at PM259310 (“Anti-avoidance: genuine finance”) was updated as follows (new wording underlined):
‘A financing arrangement which results in a genuine contribution made by the individual to the LLP intended to be enduring and giving rise to real risk will not trigger the TAAR subject to its main purpose (or a main purpose of any arrangement of which it forms part) not being to secure that the salaried members rules do not apply to the individual (or one or more other individuals).’
The BVCA wrote to Treasury Ministers, Number 10, and officials at both HMRC and the Treasury, expressing our significant concerns about the way in which this change was implemented, the policy intent behind the change in guidance and the potential retroactivity.
In early February 2025, HMRC announced that it intended to, in effect, reverse the February 2024 guidance, although as regards top-up arrangements it remains to be seen whether the new guidance will achieve a full restoration of the previous position. The BVCA will continue to engage with HMRC as the revised guidance is finalised, stressing that the new wording must be clear and not open up the risk of imposing tax retroactively.
Please see the article by Macfarlanes in the BVCA Policy & Technical Bulletin for November 2024 for further detail on the implications of HMRC’s change in guidance.