The latest – LLP Salaried Member Rules: February 2025
Recent tax case decisions and subsequent updates in HMRC guidance have provided further clarity on how the Salaried Member Rules for LLPs (“the Rules”) should be interpreted.
As a reminder, the Salaried Member Rules, introduced in 2014, were designed to combat “disguised employment” within LLPs. The objective was to ensure that LLP members whose working arrangements resemble those of employees—rather than true business partners—are classified as employees for tax purposes. This means they would be subject to PAYE and National Insurance Contributions (NICs) like regular employees.
To determine whether an LLP member should be classified as an employee, the Rules assess three key conditions (A, B, and C). If all three conditions are met, the individual is taxed as an employee. If at least one condition is not satisfied, the individual remains taxed as a self-employed LLP member.
Salaried Member Rules – Condition A: The “Disguised Salary” test
Condition A applies if 80% or more of an LLP member’s expected earnings for their work during the tax year qualify as “disguised salary.” This refers to income that is:
- Fixed, or
- Variable but not directly tied to the LLP’s overall profits and losses.
A key issue has been how “disguised salary” is defined, particularly when earnings are performance-based but subject to LLP-wide restrictions.
The BlueCrest case brought this into focus. LLP members received three types of payments:
- Priority distributions
- Discretionary allocations (often described as “bonuses”)
- Income points allocations
The Court of Appeal ruled that discretionary allocations still counted as “disguised salary” because the link between these payments and the LLP’s overall profitability was not strong enough. Simply making earnings conditional on overall firm performance is not sufficient to avoid Condition A—there must be a direct connection between an individual’s pay and the firm’s profits.
Salaried Member Rules – Condition B: significant influence over LLP affairs
Condition B examines whether the LLP member has “significant influence” over the firm’s affairs. However, the term “significant influence” lacks a precise definition, leading to disputes over its interpretation.
The BlueCrest case clarified this point, with the Court of Appeal narrowing the definition of “significant influence.” The ruling determined that:
- Influence must be assessed based on the legal rights and responsibilities outlined in the LLP agreement.
- Informal influence (such as financial sway or industry expertise) does not count.
- Influence must apply to the LLP’s overall strategy, not just specific areas or departments.
This decision marks a shift from previous interpretations, which allowed a broader view of “influence.” The case has now been sent back to the First-tier Tribunal for further review, but unless it reaches the Supreme Court, the Court of Appeal’s stricter definition of Condition B will likely stand.
Salaried Member Rules – Condition C: Capital contributions and anti-avoidance
Condition C applies if the member’s capital contribution to the LLP is less than 25% of their expected “disguised salary.” To avoid this, many LLPs have structured arrangements where members contribute genuine capital at risk, ensuring they fail Condition C and remain self-employed for tax purposes.
While these arrangements were generally accepted, a February 2024 change to HMRC guidance suggested a tougher stance on capital contributions designed to avoid employee classification. However, HMRC has since reversed this approach (February 2025), confirming that genuine capital contributions will not be challenged even if they were structured to fail Condition C.
It’s worth noting, however, that HMRC guidance is not legally binding. In fact, the Court of Appeal in BlueCrest rejected HMRC’s interpretation of Condition B, highlighting that HMRC’s views do not override statutory provisions. This means that while the latest guidance offers reassurance, future challenges remain possible.
Salaried Member Rules – Key takeaways for LLPs
Since their introduction, the Salaried Member Rules have required LLPs to carefully assess their tax position. The recent BlueCrest case and HMRC’s evolving stance on Condition C demonstrate that this remains a complex and developing area.
LLPs should stay informed about further legal interpretations and review their arrangements to ensure compliance. Given the complexities involved, and seeking specialist tax advice is highly recommended.
If you have questions about how the Salaried Member Rules apply to your LLP, particularly in light of recent developments or the recent February 2025 update, please contact us on 020 7870 9050 or email us at hello@rpgcc.co.uk.
