On 21 February 2014 HMRC issued a Revised Technical Note and Guidance on the Salaried Members Rules for LLPs. It is clear the Government is pressing ahead with these changes despite significant resistance.
These rules, as proposed, will apply from 6 April 2014 where members of LLPs are engaged on terms similar to employees rather than traditional partners. The result is those members who are caught (‘salaried members’) are taxed as employees and thus subject to PAYE. The most significant effect is the imposition of 13.8% Class 1 National Insurance Contributions.
The new rules only apply to any given member ‘M’ where all three conditions below apply:
- At least 80% of the amounts payable by the LLP for M’s services will be “disguised salary” (amounts which are fixed or variable but not dependent on the performance of the LLP as a whole).
- M does not have “significant influence” over the affairs of the LLP as a whole.
- M’s capital contribution to the LLP is less than 25% of M’s disguised salary.
HMRC’s revised note provides extensive examples of how they expect the new rules to apply in a range of scenarios and anyone advising LLPs should refer to these.
In practice, relatively few members will exert significant influence over the business of an LLP as a whole, particularly in larger LLPs. This means the majority of members will need to fail either Condition A or C to avoid being salaried members.
Increasing the capital contribution to fail Condition C is the most straightforward route. The revised technical note includes a helpful relaxation here. Provided the member is subject to an unconditional requirement to provide the additional capital by 6 April 2014 and the capital is actually contributed within three months of that date, it will qualify. This allows members time to arrange the necessary finance. New members after 6 April 2014 will have a two month window of opportunity to introduce the necessary capital provide they commit to do so at the time of becoming a member. However, in order to calculate the amount of capital contribution required, it is still necessary to identify the member’s ‘disguised salary’, which means looking at how this is defined in Condition A, with the assistance of the examples in HMRC’s note. This will take time, so works needs to start now so the member knows how much capital they need to commit to provide, as they will need to make this commitment by 6 April 2014.
Under Condition A, HMRC’s note makes clear that the test is applied looking forward to the member’s prospective remuneration. Thus, if the actual profits differ from the forecasts and would have led to a different conclusion, that is irrelevant. Neither is the test reapplied until there is a change in the remuneration arrangements for the LLP as a whole or for the individual member. Changing the basis of an individual member’s profit share or overall arrangements therefore results in both the opportunity and threat of disturbing the existing position – so the impact on salaried member status always needs to be borne in mind. HMRC note states ‘a broad and realistic view’ should be taken in deciding what constitutes the arrangement between the LLP and the member when applying Condition A. The intentions of the parties, the financial position of the LLP and the terms and conditions of the member’s remuneration and arrangements about bonuses are cited as factors which should be taken into consideration. The LLP should have sufficient financial evidence in the form of budgets, financial projections and information provided to third parties, such as banks, to support the position taken.
In view of the Government’s apparent intention to press ahead and introduce these rules on 6 April 2014, all LLPs and their members need to assess their positions urgently so that appropriate action can be taken.