Practical guide: do you need to apply the salaried member rules?

Overview

The salaried member rules are essentially designed to tackle disguised employment through limited liability partnership (LLP) membership. Broadly, where the salaried member conditions are met, a member’s terms of LLP membership are considered reflective of an employment relationship (rather than the relationship one would expect of a partner in a traditional partnership structure). As a result, the salaried member rules will deem that individual to be an employee for income tax and NI contributions purposes, meaning they are subject to PAYE and Class 1 NI.

This differs to how members of an LLP and individual partners in general or limited partnerships are taxed, where they pay via self-assessment and are subject to Class 2 and 4 NI.

The salaried member rules only apply to LLPs. They do not apply to companies, or to general or limited partnerships. The rules only concern members who perform services for the LLP in their capacity as member. So, members that no longer perform services for an LLP, but continue to receive a profit share, for example, are outside the scope of these rules.

The three conditions

The salaried member rules comprise three conditions: Condition A (disguised salary), Condition B (no significant influence), and Condition C (capital contribution). If an individual satisfies all three conditions, they are within scope of the rules and deemed to be an employee.

For an individual to fall outside of the salaried member rules, i.e. be taxed as a self-employed member of an LLP, all they need to do is fail at least one condition.

The salaried member rules only consider deemed employment of an LLP member where conditions A to C are met; other factors that would usually indicate an employment relationship for tax purposes, e.g. control, mutuality of obligation, etc. are not relevant for these purposes.

In a hypothetical scenario, the member in question:

• receives 90% of their total remuneration package as a fixed sum of £100,000 per annum
• does not have their rights and duties to the LLP described in the written LLP agreement. However, in the day-to-day running of the business, the members’ views carry weight, and their recommendations are typically followed
• has contributed £5,000 to the LLP.

Taking each condition in turn:

Condition A (disguised salary)

This condition is met if, at the relevant time, it is reasonable to expect that at least 80% of the total amount payable by the LLP in respect of the member’s performance during the relevant period will be disguised salary. An amount is considered disguised salary if it is:

• fixed
• variable, but is varied without reference to the overall amount of the profits/losses of the LLP; or
• is not, in practice, affected by the overall amount of those profits/losses.

In the case of our LLP, Condition A will be met as 90% of their total remuneration is fixed.

However, it is worth noting for wider reference that the application of Condition A and Condition B of the salaried member rules was considered by the First-tier Tribunal and Upper Tribunal (UT) in the case of BlueCrest, an LLP which provided investment management services to the BlueCrest Group’s funds.

In its decision, the UT commented that there is no need for individual members’ remuneration to track an LLP’s overall profits and losses, i.e. there is no need for an individual members’ profits to increase if overall partnership profits increase. However, the taxpayer still needs to show a link between an individual’s remuneration and overall partnership profits, and that link cannot simply be that if there were fewer profits available for distribution, an individual member would receive a lesser amount.

Condition B (no significant influence)

This condition is met if the mutual rights and duties of the members of the LLP, and of the partnership and its members, do not give the member significant influence over the affairs of the partnership.

Returning to BlueCrest, the UT commented that significant influence is not necessarily determined solely by the terms of the LLP agreement; it is also permissible to consider the matter of significant influence by reference to whether a member has actual (de facto) influence, outside of any formal agreement that governs the rights of duties of the LLP’s members.

In our case, the member in question does have significant influence. In practice, they have a significant say in the running of the business and their guidance is followed. As a result, Condition B would be failed, and so the member would not be considered a salaried member of the LLP.

It’s worth noting that the question of whether a member has significant influence over the affairs of a partnership is highly fact dependent.

However, the UT confirmed in BlueCrest that the test in Condition B is not designed to refer to whether a member has significant influence over the entirety of the partnership (the UT noted this would be a “highly unrealistic approach”). Instead, in the context of the business of the partnership, “responsibility for operational activities may give rise to significant influence. Financial performance and/or financial responsibility may give rise to significant influence. Managerial responsibility may give rise to significant influence. Again, this all depends upon the facts of the particular case.”

Condition C (capital contribution)

This condition is met if the member’s contribution to the LLP is less than 25% of the total amount of the disguised salary that it’s reasonable to expect would be payable in respect of the member’s performance during the relevant tax year.

As the member’s capital contribution is £5,000, i.e. 5% of their disguised salary of £100,000, this condition is met.

Although Condition C is met, the member is not a salaried member. This is because it’s only necessary to fail one of the three conditions to be outside of the salaried member rules. As the member failed Condition B (per the above) the salaried member rules do not apply.

Wider application

In this scenario, the member did not meet the conditions to be a salaried member. However, it is worth remembering that you should be comfortable with the salaried member position of all other members of the LLP. Just because one individual is not a salaried member has no bearing on whether another member would meet all three conditions.

This is because the salaried member rules are highly fact-specific (as the UT also stressed in BlueCrest), with the answer turning on the particular facts and circumstances, and each LLP member’s individual circumstances within the partnership. The three tests are also not static: members need to be reassessed at relevant periods to determine whether they meet or fail the conditions.