Under the salaried member rules some members of limited liability partnerships (LLPs) are treated as employees for tax and National Insurance contribution (NIC) purposes, rather than as self-employed.
What are the salaried member rules?
The salaried member rules are designed to prevent tax avoidance by targeting members of LLPs who function more like employees than traditional partners (ie disguised employees). These individuals, known as ‘salaried members,’ have their profit shares treated as employment income, which is subject to PAYE and employer’s NICs.
A member of an LLP will be treated as an employee under these rules if the following three conditions are all met:
- Condition A: It’s reasonable to expect that at least 80% of the total amount payable by the LLP, in respect of the individual’s performance, will be ‘disguised salary’. This broadly means that the payment is fixed, or not varied or affected by the overall profits or losses of the LLP.
- Condition B: The mutual rights and duties of the members of the LLP, both between themselves and between them and the LLP, do not give the individual ‘significant influence’ over the affairs of the LLP.
- Condition C: The individual’s capital contribution to the LLP is less than 25% of their ‘disguised salary’.
Broadly, these conditions consider income, influence over the LLP, and capital as measures to determine whether a member is self-employed or an employee. An individual will be treated as self-employed if they don’t meet at least one of the conditions.
Since the rules were introduced in 2014, they have included a targeted anti-avoidance rule (TAAR) that “no regard is to be had to any arrangements the main purpose, or one of the main purposes, of which is to secure that [the salaried members rules do] not apply.”
In practice, people have relied on the detailed guidance and examples published by HMRC at the time the rules were introduced to decide if an individual will be subject to the salaried member rules.
What’s changed with the salaried member rules?
Since early 2024 there have been developments in respect of both Condition B and Condition C which have cast significant doubt on people’s understanding of the rules.
Condition B – HMRC v BlueCrest case
In January 2025, the Court of Appeal issued its decision in HMRC v BlueCrest Capital Management (UK) LLP. This narrows what is meant by ‘significant influence’ in Condition B compared with the previous decisions by the First-tier Tribunal and Upper Tribunal, as well as HMRC’s published guidance. The Court ruled that only influence conferred by the statutory and contractual framework governing the operation of the LLP is to be considered when assessing ‘significant influence’. In this case this was in the LLP agreement, but depending on the wording of the LLP agreement it could also be in the relevant legislation.
This is at odds with HMRC’s guidance in the Partnership Manual at PM256200, which says that “in looking at whether or not an individual member has significant influence it is important not only to look at the written agreement, but also to look at how the LLP operates in practice.”
Giving the Court’s judgment, Sir Launcelot Henderson made some interesting comments on ‘significant influence’. Firstly, he pointed out that ‘significant’, ‘influence’ and ‘affairs’ are not defined in the legislation.
Secondly, he went on to say that while ‘non-qualifying influence’ (ie influence not derived from the LLP agreement, etc) must be ignored when considering the type of influence relevant for the purposes of Condition B, it can be relevant in determining whether influence is ‘significant’ or not.
It may be that this is limited to the facts in Bluecrest where one individual, who was a co-founder of the business and the largest investor but crucially was not an LLP member, could as the judge put it ‘usually, and perhaps always, ensure that his wishes were followed’. In effect, his dominance could effectively preclude anyone else, including LLP members, from having significant influence. Perhaps a line of reasoning that has more merit where there is one dominant individual, but whether it applies in the more typical LLP situation where there is a collective decision-making process will be interesting to see. There is also the potential for a lot of navel-gazing over what it is to ‘influence’ a business and its decision making, but we will leave that for a separate article.
The Court also took the view that having ‘significant influence over the affairs of the LLP’ requires significant influence over the affairs of the whole LLP generally, which includes but is wider than just the LLP’s business, with a focus on strategic-level decision making.
The case has been referred back to the FTT to remake its decision by reconsidering the evidence in light of the narrower interpretation of condition B.
Condition C – HMRC’s salaried member guidance
After 12 months of uncertainty in February 2025 HMRC announced that it was reverting to the position that most tax advisers believed had been the law since the salaried members rules were introduced in 2014. This followed HMRC changing its guidance on Condition C in February 2024, without warning or explanation.
The February 2024 changes, which included examples, raised the prospect of HMRC invoking the TAAR even in the case of capital contributions where the member was making a genuine financial commitment and faced real risk should things go wrong. This provoked some strong reactions, with many commentators saying that the changes were not in accordance either with the stated purpose of the salaried members rules or HMRC’s own guidance.
The latest announcement, as set out in a statement made by HMRC to the Chartered institute of Taxation, is as follows:
“HMRC’s position remains that the TAAR applies if the main purpose, or one of the main purposes, of the arrangements is to secure that the salaried member rules do not apply.
“In applying this test, HMRC will continue to take into account the policy intention underlying the legislation, which is to provide a series of tests that collectively encapsulate what it means to be operating in a typical partnership.
“In doing so, HMRC would not consider that genuine and long-term restructuring that causes an individual to fail one or more of the conditions to be contrary to this policy aim [see Partnership Manual at PM259100].
“In relation to Condition C specifically, HMRC also accept that an 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.
“This means that a contribution made under a top-up arrangement will not, in HMRC’s view, trigger the TAAR if the arrangement results in a genuine contribution made by the individual to the LLP, intended to be enduring and giving rise to real risk.
“We are therefore intending to amend our guidance in the Partnership Manual, including at PM259200 and PM259310. The amended guidance will, in effect, reverse the changes that were made in February 2024.”
This is welcome news and takes away a lot of the concerns circulating among professional partnership LLPs which had only been trying to apply the rules in accordance with HMRC’s original guidance. At least in relation to Condition C, this clarification should, it is hoped, be the end of the matter.
What this means for LLPs
Even though we now have reassurance and a return to the status quo on Condition C, the ongoing uncertainty from Bluecrest and the narrowed definition of significant influence for Condition B means that there’s a way to go yet before we have full clarity.
Even on Condition C HMRC ‘s latest pronouncement starts with a reminder of the TAAR. The salaried members rules have been an area of deliberate focus from HMRC for some time now and it will be a while before we can be comfortable that concerns in this area have completely gone away.
How we can help
We can explain what the recent Court of Appeal decision and HMRC’s latest position mean in the context of the salaried member rules and your business. We can also help assess the impact of these stricter rules on your LLP.
If you’d like to discuss these changes and how the salaried member rules apply to your LLP, please speak to your usual Saffery contact or get in touch with Mike Hodges.
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