HMRC has recently changed its published guidance to make clear that it considers that increases in capital contributions made solely to fall outside the salaried members rules will be ineffective for that purpose.
Under the salaried members rules, members of an LLP are treated as employees for tax purposes only if three conditions are met. Broadly, these are:
There is also a targeted anti-avoidance rule ("TAAR") that requires, when applying the salaried members regime, the disregard of arrangements which have a main purpose of ensuring that the regime does not apply.
HMRC has amended its published guidance in relation to capital contributions.
In particular, HMRC has added a new example (Partnership Manual 259200 - here) that makes clear that it considers that the TAAR applies where a capital contribution is increased pursuant to an arrangement that allows members to alter their contributions in each period in order to avoid meeting Condition C.
In addition, previous guidance that had said that a genuine contribution intended to be enduring and giving rise to real risk would not trigger the TAAR, has been removed (from Partnership Manual 259310 - here).
This change in the guidance will be of direct concern to those LLPs and their members who have been party to arrangements under which members increase their capital contributions to ensure the continued non-application of the salaried members rules. In addition, more generally, the change throws further doubt on the extent to which steps can be taken to fall outside the conditions.
The salaried members rules are intended to ensure that LLP members who are more like employees than partners in traditional partnerships are, for tax purposes, treated as employees. The three conditions that must be met for the rules to apply were designed to reflect ways in which an individual can demonstrate true partner-like status.
Many have therefore taken the view that these conditions provide an objective test for whether the salaried members rule apply - in the sense that, provided an arrangement which causes one of the conditions to be failed is of an enduring nature and has genuine consequences, it should not be disregarded by the TAAR. Essentially, on that view, the taxpayer has ordered their affairs in the way intended by Parliament (i.e. they have heeded a "keep off the grass" sign) and should not be penalised for doing so.
Up until fairly recently, it seemed that HMRC also took this view. Indeed, its published guidance said, and still says, that it will not consider that a genuine and long-term restructuring that causes an individual to fail one or more of the conditions is contrary to the policy aim of the legislation. However, the case of BlueCrest and HMRC's guidance changes indicate that HMRC is taking a wider view of when the TAAR applies, focusing on the intention behind an arrangement rather than the fact that it has genuine commercial consequences that the parties have to live with.
In addition, HMRC may feel the need to rely on the TAAR more often as a path to apply the salaried members rules as a result of the tribunals in BlueCrest interpreting Condition B more narrowly than HMRC contended and holding that the link between remuneration and profit share does not have to be strong for Condition A to be failed.
If you would like further information about how HMRC's change in approach could impact your business, please do get in touch.
