Salaried Partners – Changes to HMRC guidance

In November we reminded you about the tax treatment of salaried partners following the case of Bluecrest Capital Management (UK) LLP v HMRC. Following that case HMRC have updated their published guidance. 

As a recap, rules came into force back in 2014 deeming certain members of a Limited Liability Partnership (LLP) as employees if the member meets three conditions: 

• Condition A – At least 80% of their reward for services is ‘disguised salary’, fixed or variable without regard to the overall profits or losses of the partnership. 
• Condition B – The mutual rights and duties of the members and the partnership do not give them significant influence over the affairs of the partnership; 
• Condition C – They have no significant money investment in the LLP, i.e. their capital contribution is less than 25% of their disguised salary. 

The guidance has been amended in relation to Condition C by removing the existing example and adding a new example. The new example illustrates that where the members capital contribution changes to reflect an increase in their fixed profit salary, this could be construed to trigger the targeted anti avoidance rule (TAAR).  For example, a member contributed capital of £15,000 on joining the partnership, the following year their fixed profit share increases to £100,000 and so they will meet Condition C, so they contribute a further £10,000 of capital as part of a separate arrangement. The previous example referred to capital of a continuing and enduring nature. 

Having lost their challenge on Condition B in the Bluecrest case, HMRC are now re-considering their approach to Condition C to tackle perceived abuse of these arrangements. Law firms will have to consider arrangements for fixed share members very carefully and remove any correlation between changes to fixed profit shares and capital contribution to ensure they cannot be challenged by HMRC.