In February 2025, HMRC announced that they were going to update their guidance to remove the blanket application of the targeted anti-avoidance rule (TAAR) to capital contributions made to a Limited Liability Partnership (LLP) in order to fail Condition C of the salaried members legislation. That guidance has now been issued, in line with what was trailed earlier in the year. It is a welcome return to what was previously understood to be HMRC’s position (i.e. making a capital contribution top-up in order to fail Condition C of the salaried members legislation won’t necessarily trigger the TAAR). It is however, a little more than that. It provides clear confirmation that HMRC’s interpretation of the rules has parliamentary intent at its heart. That intent was to ensure only genuine partners are afforded self-employed tax status, which in respect of Condition C means any capital contribution made (top-up or otherwise) needs to be “genuine, enduring and at real risk”. Whilst this isn’t a change to current law, it should serve as a reminder to LLPs to make sure their capital contribution policy and management of capital is fit for purpose.
At a glance
Background
For an overview of the salaried members rules, the parliamentary intent behind them and the background to the TAAR guidance changes, see our previous two articles:
The purpose of the capital contribution
“Genuine, enduring and at real risk” - those are the oft-repeated key words in HMRC’s guidance. Contributions must be genuine, enduring and at real risk to avoid application of the TAAR. But practically, what does that mean? The new guidance tells us to look at the ordinary meaning of those words and to have regard to all facts surrounding the case when determining if a capital contribution meets that definition. There is further commentary on some aspects, but it seems that the over-riding question is “what is the purpose of the capital contribution?” On a very simplistic level if it is to:
a) Ensure the partner has economic exposure to the failure of the business; and
b) Meet a commercial need of the LLP (other than attracting talent through applying a more favourable tax regime on earnings)
Then the contribution would be a long way towards being “genuine, enduring and at real risk”.
Of note in the detail of the guidance is:
- Commentary that any ring-fencing of capital contributions for the benefit of specific members or contributions made by partners that are circular in nature are likely to trigger the TAAR;
- Appreciation that a call for capital from LLPs which are already well-capitalised does not mean that the contribution is not genuine or at real risk, as long as the contribution is available for commercial use. Furthermore, whilst a well-capitalised LLP might mean the risk of insolvency is low, this does not mean that there is not genuine risk to the partner of losing their capital contribution;
- Appreciation that capital is required for a number of commercial reasons, including to meet regulatory requirements;
- Commentary highlighting that ‘real risk’ means economic risk of loss to the partner, rather than the LLP itself being at risk of making a loss; and
- Direction to further commentary on the position in respect of contributions funded by loans (largely this would not immediately trigger the TAAR, but previous conditions on loan funded capital remain) and top-up arrangements for members on a short-term appointment (where consideration as to whether the contribution is enduring will be a key factor).
What next?
As we’ve noted previously, HMRC’s purposive interpretation of the legislation on Condition C seems at odds with the Court of Appeal’s literal interpretation of Condition B in the ongoing BlueCrest litigation and on which there are currently no further updates. It will be interesting to see if an appeal would re-align Condition B to a purposive interpretation of the law.
In the meantime, the new guidance provides welcome clarity on how HMRC will seek to apply the TAAR to capital contributions made in order to fail Condition C, in what has been (and arguably still is) an uncertain time for those seeking to apply the salaried members legislation. Those LLPs with members relying on a failure of Condition C will be relieved at the removal of the blanket application of the TAAR, but they should use the issue of the new guidance to prompt a review of their capital contribution policy and management of capital to ensure it is fit for purpose.
For further information please contact: