London buildings Georgian style

HMRC nudge campaign

Salaried member retests

Louis Baker
London buildings Georgian style

HMRC is launching a mailshot campaign reminding LLPs of the salaried member legislation and recommending that firms review their compliance with this (and of course encouraging disclosure of non-compliance situations).

As a reminder, the salaried member tests need retesting at least annually.

Members of an LLP should be taxed under PAYE as a salaried member unless they fail one of the following tests:

  • Condition A: at least 80% of their income is of disguised salary
  • Condition B: they do not have significant influence over the affairs of the LLP
  • Condition C: their capital is not at least 25% of their disguised salary.

If the answer to at least one of the above tests is 'no', the member should be taxed as a self-employed partner.

Conditions A and C are forward-looking based on reasonable expectation.

Condition A should be tested at the start of the firm’s profit-sharing period, which HMRC expects to be the financial year for most firms. The test looks at the reward each partner expects to earn for the profit-sharing period, and the extent to which it is disguised salary.

Condition C should be tested at 6 April, looking at the reward each partner expects to earn for the year to 5 April following, and compares this with the level of capital subscribed to the firm.

Retests are also required on a variety of other occasions, including when a member joins the firm, when the firm’s profit share arrangements change, the management structure changes and when a member’s status changes.

An amount is Disguised Salary if it is:

  • fixed, or
  • variable, but varied without reference to the overall amount of the profits or losses of the LLP, or
  • not, in practice, affected by the overall profits of the LLP.

Firms should take care to document their salaried member retest reviews so they are available for when HMRC checks how the firm has ensured compliance with the legislation.

Contact us to discuss the application of the salaried member legislation to your firm’s circumstances.

Contact us

Louis Baker
Louis Baker
Partner, Head of Professional Practices