Salaried members rule
HMRC’s U-turn on Condition C
HMRC have now published their revised guidance on the salaried member legislation in respect of Condition C. Given that many professional firms rely on their members failing Condition C; if their capital is 25% or more of their disguised salary, this will come as a welcome relief.
This U-turn comes after receiving backlash when guidance was amended last year to state that top up capital contributions would be disregarded when considering the test. It also emphasised that where the main purpose, or one of the main purposes, of the capital contribution was to fail Condition C, it would be disregarded for the purposes of the test.
The issue concerned individuals that were making capital contributions or topping up their capital periodically to ensure that it was at least 25% of their disguised remuneration. HMRC had stated that this would fall foul of the anti-avoidance rules and that the top up amount would be ignored when considering Condition C.
HMRC has now removed this commentary from their guidance and accept that genuine contributions made to the LLP, intended to be enduring and giving rise to real risk, will not trigger the anti-avoidance rules. Any top up capital payments will therefore be considered when testing Condition C.
HMRC has also included some clarification on what they deem to be “real risk”. The key is that the individual is actually at risk of losing their contribution, whether funded personally or via a loan, in the event that the LLP makes a loss or become insolvent.
The guidance also states that HMRC will consider how the capital is used in the LLP to determine if it is genuine or at real risk. It goes on to say that if the capital was ringfenced in a separate account for the benefit of the individual, rather than being available for use by the LLP, it may indicate the contribution is not genuine or at real risk.
This update provides greater clarity on Condition C and helpfully confirms that HMRC will consider top up capital payments when reviewing the test.
If you would like to discuss the above further, please speak to one of Crowe’s professional practice specialists. For a reminder of the rules in respect of salaried members please see our previous briefing, Salaried member review retests for a reminder of the rules.
If you have any questions or would like to discuss any of the issues raised in this article, contact Ben Carter, Nicky Owen or get in touch with your usual Crowe contact.
