HMRC has issued updated guidance on salaried members in Limited Liability Partnerships (LLPs), in relation to capital contributions.
LLPs incorporate elements of both partnerships and limited companies. Whilst LLPs are taxed in a similar way to traditional partnerships, the liability of each partner is limited to the amount of capital that they put into the business.
Partners in an LLP are typically considered to be self-employed owners of the business rather than employees. However, in certain circumstances, partnership members must be treated as employees – known as salaried members.
Defining employees
In an LLP, a member will be a salaried member if the following conditions apply:
- At least 80 per cent of the amount payable by the LLP to the individual takes the form of ‘disguised salary’ – i.e. it is not variable or affected by the financial performance of the business.
- They do not have significant influence over the affairs of the LLP.
- Their capital contribution is less than 25 per cent of their disguised salary.
Targeted anti-avoidance rules
Since the rules were introduced in 2014, a Targeted Anti-Avoidance Rule (TAAR) has applied to stop individuals from intentionally avoiding classification as a salaried member.
What has changed?
HMRC has updated its guidance on salaried members, particularly concerning the alteration of capital contributions.
A new example in the guidance suggests that the TAAR will apply where an individual’s disguised salary rises, and that individual increases their capital contribution to ensure that the total capital contributed exceeds 25 per cent of their disguised salary.
In those circumstances, HMRC will disregard the additional capital contributions made, meaning that the individual will be treated as a salaried member.
The suggestion being that the TAAR will still be applied even when there is a genuine capital contribution to the partnership by the individual.
Why is this important?
Whether an individual is classed as a partner in an LLP, or a salaried member determines how their income will be taxed.
An employee will be subject to employment taxes via PAYE and the partnership will pay Class 1 employers National Insurance.
By contrast, a partner must report their income via Income Tax Self-Assessment (ITSA) and is responsible for the payment of tax on income earned.
