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      Salaried members – Update on TAAR and capital contribution top ups

      HMRC intend to amend guidance on salaried members TAAR, removing its blanket application to capital contribution top ups under Condition C
      event 20 Feb, 2025

      At a glance

      The ‘Salaried Member’ rules have received a lot of attention over the past 12 months. Introduced in 2014 to ensure that only genuine partners were afforded self-employed tax status, this year has already seen a significant tax ruling on their application and now we are expecting HMRC to update their guidance to remove the blanket application of the targeted anti-avoidance rule (TAAR) to capital contribution top-ups which are made in order to fail Condition C.

      This isn’t a wholesale change in HMRC’s application of the TAAR; prior to 2024 it was accepted practice that the TAAR would not always apply to capital contribution top ups made to fail Condition C, but last year a change in HMRC’s guidance suggested it did. We understand the latest update will be a return to HMRC’s previous position.

      The certainty is welcome, particularly in light of the recent BlueCrest decision, but LLPs should be aware that whilst the TAAR will not automatically apply, any capital contribution made still needs to be enduring and give rise to real risk to avoid the TAAR applying.

      Richard Green-image
      Richard Green

      Tax Director, Professional Services

      KPMG in the UK

      Salaried members and parliamentary intent

      The intent of the ‘Salaried Member’ legislation is to ensure that self-employed tax status is only extended to members of an LLP that act as genuine partners. Members who aren’t deemed to be genuine partners will instead be taxed as employees, with all the attendant PAYE and NIC implications.

      But what is a ‘genuine partner’? Parliament deemed that genuine partners would have at least one of three hallmarks: their income would be linked to the performance of the LLP; they would exert significant influence over the LLP; and membership of the LLP would expose them to real economic risk. The legislators drafted this as three conditions:

      • Condition A – Disguised remuneration – Broadly 80 percent of the member’s profit share is ‘disguised salary’ i.e. remuneration that is fixed, or variable without relation to the overall profits of the LLP, or not in practice affected by those profits;
      • Condition B – The member does not have significant influence over the affairs of the LLP; and
      • Condition C – The member’s capital contribution to the LLP is less than 25 percent of their ‘disguised salary’.

      Fail any of these conditions and you would be deemed a genuine partner and would be taxed as self-employed. Overriding all of this is the TAAR that states that no account will be taken of any arrangement that leads to the failure of one of the conditions where the motivation for that arrangement is to fall outside the ‘salaried members’ rules.

      Changes to the interpretation of the TAAR

      For a number of years, it had been accepted practice that where partners ‘topped-up’ their capital contribution to the LLP (and in doing so their capital contribution reached such a level that would make them fail Condition C), the TAAR would not apply. However, in 2024 HMRC added an example to their manuals on when the TAAR would apply that directly referenced such an arrangement and indicated that the TAAR would be applied (this was covered in our earlier article). The LLP community responded with various representations to HMRC to reflect on the position.

      As reported by the Chartered Institute of Taxation (CIOT), HMRC have now indicated that they are going to amend their guidance. Whilst the new guidance has not yet been released, we expect it to highlight that the policy intention behind the TAAR will be taken into account when deciding which arrangements it applies to. As noted above, the policy intent behind Condition C is that the partner’s contribution should expose them to real economic risk. The capital contribution must therefore be a genuine contribution made by the individual to the LLP, intended to be enduring and giving rise to real risk. HMRC state that where this is the case, the TAAR will not be triggered. 

      In amending this guidance, HMRC appear to be moving toward the principle of ‘substance over form’ – there has to be reality behind a transaction. The irony here is that recent litigation concerning the application of Condition B (i.e. the BlueCrest case covered in our earlier article), seemed to move away from this principle. It will be interesting to see if an appeal would seek to realign the principles behind the two conditions. We note that an application for permission to appeal was lodged at the Supreme Court on 14 February 2025.

      What does this mean for LLPs?

      This is welcome certainty for LLPs whose partners rely on a failure of Condition C to preserve their self-employed tax status. However, while it is clear that this removes blanket application of the TAAR on capital contribution top-ups made to fail Condition C, care still needs to be taken that any contributions made are enduring and give rise to real risk. While clarification on HMRC’s view of how the TAAR should be applied is helpful, LLPs need to be certain that they can evidence a clear business rationale for a call for capital. This is clearly an area of HMRC interest and the changing interpretation of the rules via HMRC guidance and in the courts underlines the need for those affected to take specific advice.

       

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