February 2025 update to salaried members rules

In February 2024, HMRC published its revised guidance to the salaried members rules. The rules have guided the way that law firms and other professional partnerships remunerate fixed share partners for many years.

Changes in HMRC’s partnership manual

The changes were set out in HMRC’s partnership manual at PM259200 and PM259310. These rules stated that capital contribution top-up payments made by fixed salaried members to keep their contributions in line with a 25% capital contribution whenever their disguised salary changed would not necessarily cause condition C of the applicable rules to be failed.

The implication would be that any such contribution may cause HMRC to consider the fixed share member to be an employee rather than self-employed for tax purposes.

Focus on disguised salaries and capital contributions

This represented a significant shift in focus by HMRC towards law firms. I believe LLPs should still pay close attention to the definition and calculation of disguised salaries. They should also carefully consider the timing of capital contributions by fixed salary members. This is particularly important given the changes in employer national insurance contribution rates, which will increase from 13.8% to 15% starting on 6 April 2025.

The Chartered Institute of Tax challenged HMRC on its wide interpretation of the legislation and the changes in February 2024. HMRC responded last month to announce that it intends to amend those 2024 guidance changes.

HMRC’s confirmation on restructuring

HMRC has confirmed that it will not consider genuine and long-term restructuring that causes an individual to fail one or more of the conditions to be contrary to the policy aim of applying the targeted anti-avoidance rule (TAAR). The TAAR will still apply if the main purpose, or one of the main purposes, of the arrangements is to ensure that the salaried members rules do not apply.

For salaried members in LLPs, this means that HMRC does not consider a genuine contribution made under a top-up arrangement to trigger the TAAR. This is the case if the arrangement results in a genuine contribution by the individual to the LLP and is intended to be enduring and involve real risk.

This specifically relates to condition C and is a welcome confirmation that a genuine long-standing restructuring, which causes an individual to fail the test, will not be contrary to the policy aim of the TAAR.

HMRC has not yet amended the manuals. But we will keep you informed of anything relevant as they appear.

It is also worth remembering that there is an additional focus by HMRC in relation to condition B – which is often a relevant test for smaller LLPs. Condition B provides that LLPs will treat a salaried member as an employee for tax purposes if they do not have significant control. This is useful for firms whose salaried members do not fail condition A, which requires that at least 80% of the salaried member’s total remuneration is fixed (disguised remuneration), or condition C.

HMRC v BlueCrest Capital Management case

Condition B is the subject of an ongoing court case. HMRC v BlueCrest Capital Management (UK) LLP relates to the interpretation of condition B and the application of the ‘significant influence’ test.

The tribunal in this case originally held that members of the LLP exercised ‘significant control’ over aspects of the partnership. These were general and fell outside matters of the LLP agreement. Salaried members were able to exert influence over aspects of the LLP, and the tribunal concluded that this enabled them to fail condition B and be treated as self-employed for tax purposes.

The Court of Appeal instructed the tribunal to revisit its decision. It must consider only the “rights and duties of the members of the limited liability partnership, and of the partnership and its members”.

It is likely that this review will conclude that general influence over the partnership, as opposed to matters in the LLP agreement, will not constitute sufficient influence for the purposes of condition B. If this is the case, it will be important for LLPs to clearly define the rights and responsibilities of their fixed share members. Additionally, the LLP agreement should explicitly cover the requirements of condition B.

Practical steps for LLPs

The rules for salaried members continue to be complicated. Although, you can take practical steps to ensure the LLP agreements and procedures are robust. The fact that HMRC has looked at these issues is a warning and suggests that actions to ensure compliance with the details of the rules are crucial.

Please contact me if you would like to discuss this further.