In February 2024, HMRC updated its guidance on its interpretation of the legislation that determines the tax status for members of an LLP. We commented on the updated guidance in our article Tax update: Salaried member rules – a shift in HMRC guidance.
As a reminder, the salaried members rules were introduced in April 2014 and, where the rules apply, they result in an LLP member being taxed on their profit share as if they were an employee in receipt of a salary.
The rules do not apply if a sufficient proportion (more than 20%) of the member’s profit share is variable (by reference to the performance of the firm and not the person or their team), so the rules are typically of concern to fixed-share members. In addition, the rules do not apply if the member has contributed at least 25% of their profit share to the LLP as fixed member’s capital.
HMRC’s guidance at the time the rules came in advised that a genuine long-term capital contribution made by the member that presented a real risk of their own money would mean they continued to be taxed on a self-employed basis, provided the contribution satisfied the 25% threshold.
Following their February 2024 update, HMRC now caveat their previous guidance and claim that capital contributions designed to avoid the member being taxed as an employee are to be ignored. This change of interpretation has caused a great deal of uncertainty amongst firms that, to date, believe they have acted in accordance with the rules and HMRC’s interpretation of them. We understand there are instances of HMRC’s compliance teams applying the new interpretation as part of their compliance activities, with large amounts of tax potentially at stake.
The Chartered Institute of Tax (CIOT) has recently written to HMRC setting out concerns about their new approach, pointing out that it:
- is a departure from HMRC’s guidance published when the rules were introduced and on which firms have relied to date;
- appears to go against the policy intention behind the salaried members rules; and
- ignores the very real commercial consequences of the member making their capital contribution to the firm.
We await HMRC’s response to the CIOT’s letter, which we hope will see HMRC revert to their previous interpretation and restore certainty for firms over their tax position and that of their members. In the meantime, we are working with leading Tax Counsel on self-employed tax matters to further our own strength of view on both legislative and practical matters on this important topic.
If you would like advice as to how these developments may affect your tax position, or how to structure the members’ tax affairs generally, please do get in touch with your usual contact in our Legal team.
