Salaried Member Rules – why are firms still getting it wrong?
20 March 2023
Salaried member rules are a set of provisions which seek to ensure that only individuals whose duties reflect those of a ‘traditional’ partner, are taxed as self-employed individuals. These provisions have been with us for nearly nine years, but some firms are still getting it wrong.
Whilst the majority of firms seem to be comfortable with the basic premise of the rules, we continue to see their application come under intense scrutiny from HMRC. This has also become an increasing area of interest during the financial due diligence in buyouts and other similar transactions. Naturally, the ongoing attention from HMRC has made this an area that potential suitors are increasingly interested in, as they do not want to be caught out by the failures of predecessors to apply the legislation correctly.
Firms are getting the basics wrong, including good tax governance, reviews when partners join or retire from the firm and an understanding of what is “disguised remuneration”.
The Bluecrest Capital Management LLP V HMRC (FTT) judgment, the first case on “salaried member rules”, clearly illustrates that HMRC has and will continue to focus on this area.
Reminder of the rules
The salaried member rules work by comparing the working arrangements of each individual member to three conditions. If the individual satisfies all three conditions, they should be treated as an employee for tax purposes, resulting in PAYE obligations and employer NIC treatment.
The three conditions are:
A: it is reasonable to expect that at least 80% of a member’s share of profit is ’disguised salary’;
B: the individual does not have ‘significant influence’ over the affairs of the LLP; and
C: the individual’s capital contribution is less than 25% of the amount of the disguised salary it is reasonable to expect the member to receive.
Condition A
HMRC define disguised salary as an amount which is:
fixed;
variable, but without reference to the overall amount of the profits or losses of the LLP; or
it is not, in practice, affected by the overall profits or losses of the LLP.
Condition B
The idea of significant influence is subjective and as such, HMRC will look at the mutual rights and duties of the members and the LLP. HMRC will look at whether the member can and does exert significant influence over the LLP’s business.
Condition C
Many firms rely on condition C. However, if there are any changes in fixed profit shares or the introduction of new partners and retirement of partners, their capital contributions invested in the firm must be reviewed and where appropriate, increased. Failure to do so will result in a requirement for the partnership to deduct tax and NICs under PAYE from the partners’ drawings.
Our specialist professional services tax team are working with many firms to review the processes and procedures they have in place to stay compliant with the salaried member rules. An initial assessment is a relatively straightforward but extremely valuable project, with many of our clients making both major and minor changes following reviews. These changes have given them comfort that they will not fall foul of the HMRC guidance and the anti-avoidance tax legislation.
Contact Mark Waddilove or Nick Sommerfelt for more information on how we can help.
