As we mentioned in our recent Legal Focus publication, in February 2024 HMRC issued new guidance on the Salaried Members rules, which determine whether LLP members are taxed as employees or on a self-employed basis. This new guidance suggested HMRC would look to challenge arrangements where fixed share LLP members ‘topped up’ their capital accounts in order to have sufficient capital invested in the LLP to be self-employed (one of the tests, ‘Condition C’ is that the LLP member has invested capital amounting to at least 25% of their profit share). HMRC have recently performed a U-turn on this, and now say they will amend their guidance again, effectively reversing the changes that were made in February 2024.
HMRC’s statement to the CIOT noted the following: “A contribution made under a top-up arrangement will not, in HMRC’s view, trigger the TAAR if the arrangement results in a genuine contribution made by the individual to the LLP, intended to be enduring and giving rise to real risk.”
This is good news, and will be welcomed by many LLPs that have been concerned about HMRC’s 2024 guidance. A brief note on this issued by the CIOT can be found here.
In addition, there has been a case running in the background (the ‘Bluecrest’ case) on ‘Condition B’ of the Salaried Members rules. Condition B states LLP members are self-employed if they have significant influence over the affairs of the LLP. This case has gone through various courts and the Court of Appeal recently referred it back to the First Tier Tribunal.
The Tribunal originally found that certain members of the LLP in question did have significant influence over some aspects of the LLP, and that was sufficient for those members to be taxed on a self-employed basis. The Court of Appeal has instructed the Tribunal to remake their decision, this time looking solely at the “rights and duties of the members of the limited liability partnership, and of the partnership and its members”, based on the terms of the LLP agreement, and with regard to the affairs of the LLP as a whole.
The original decision had looked at factors outside of the LLP agreement, including what happened “on the ground”. It seems likely that this time round the Tribunal will find the LLP members did not have significant influence over the affairs of the LLP as a whole, but we await their decision to know for sure.
Firms relying on Condition B will need to revisit their LLP Agreement in light of this decision, to ensure that it is clear about the roles and responsibilities of any fixed share members, since this is likely to be the key factor in future.
If you would like advice as to how these developments may affect your tax position, or how to structure members’ tax affairs generally, please do get in touch.
