Partnership Manual

PM259200 - Becoming a member

ITTOIA/S863G(1)

In deciding whether an individual is a Salaried Member, no regard is to be had to any arrangements the main purpose, or one of the main purposes of which, is to secure that the individual (or that individual and other individuals) is not a Salaried Member. 

In applying this test (Targeted Anti-avoidance Rule (TAAR)), HMRC will take into account the policy intention underlying the legislation, which is to provide a series of tests that collectively encapsulate what it means to be operating in a typical partnership.

A genuine and long-term restructuring that causes an individual to fail one or more of the conditions is not contrary to this policy aim.

Example 1

This example looks at junior members and how one member makes the transition to a more senior position.

The XYZ LLP typically has about 100 members.

Existing employees can be invited to become junior members. As a junior member, they initially introduce £4,000 as capital and receive "4 units". The unit is the measure by which residual profits are allocated. As a comparison, the senior partner has 150 units.

The term "unit" is not material; it is simply the method of allocating the residual profits.

Junior members are awarded a fixed guaranteed profit share, plus the profit from their units. For a junior member, the profit share under the unit system will be no more than 5% to 10% of the total package.

The firm's management power is centralised in a management board formed by the senior members.

The junior members satisfy all three conditions, they have less than 10% of their reward package as a variable profit share, nominal capital only and no real say. Catherine has been a junior member but is being promoted. She will sit on the management board and have a significant influence over the running of the business. In addition, she will receive more units but it is still reasonable to expect that less than 20% of her reward package will be variable.

Catherine has accepted an opportunity to participate in the business in much the same way as a senior member, even if, as a relatively junior member, she is still substantially rewarded by a fixed profit share. Catherine would still satisfy Condition A but she is not a Salaried Member as she now does not satisfy Condition B.

This is a genuine change in the terms and conditions, the TAAR does not apply.

Example 2
This example looks at an arrangement where members can alter their capital contributions in each period to avoid meeting Condition C.

In 2018, upon joining the ABC LLP, member X contributed capital of £15,000. 

In 2022 it is expected that X's remuneration for the next tax year will consist of £100,000 Disguised Salary (see PM255600) , meaning that their contributed capital is below the 25% threshold, and they will meet Condition C. 

X contributes a further £10,000 as part of a separate "top-up" arrangement with the LLP, where members increase their capital contribution periodically in response to their expected Disguised Salary.

It will be a question of fact as to whether the inititial and/or further contributions were made as a result of arrangements with a main purpose of securing that the salaried member rules do not apply. 

In applying this test, HMRC will take into account the policy intention underlying the legislation (PM259100). See also PM251000 and PM251010 for further guidance on the policy intnetion of the legislation and TAAR. 

HMRC accepts that a genuine contribution made by the individual to the LLP, intended to be enduring and giving rise to real risk, will not trigger the TAAR (PM259100, PM259310 and PM259310). As such, the TAAR will not apply to disregard the initial (2018) and/or separate top-up (2022) arrangements if those respective arrangements result in the individual making a genuine contribution to the LLP which is intended to be enduring and giving rise to real risk. 

All the facts and circumstances should be taken into account when determining whether contributions are genuine, intended to be enduring and at real risk within the ordinary meaning of those words. The fact that an amount may be a contribution within the meaning of ITTOIA05/863E(2) (PM258200) does not mean it is genuine, intended to be enduring and at real risk for the purpose of applying the TAAR. 

Note that “real risk” refers to whether the individual is personally at actual risk of losing the contribution (whether funded out of their own money or a loan) in the event that the LLP makes a loss or becomes insolvent, rather than whether the LLP itself is really at risk of making a loss. The fact that an LLP is well capitalised, such that practical risk of insolvency is very low, would not mean that the contribution is not at real risk. 

Such contributions may be funded through a loan. See PM259300+ for guidance on how the TAAR may apply in such circumstances. It may also be possible that an individual on a short-term appointment may make further contributions as part of a top-up arrangement (in which case, see PM259400). 

Regardless of how a contribution is funded, HMRC will also take into accounthow it is used by the LLP in determining whether it is genuine and giving rise to real risk. If the LLP does not intend to, or does not in fact, make commercial use of the contribution, that may indicate that it is not a genuine capital contribution or at real risk. For example, if a contribution is held in one or separate ringfenced accounts for the benefit of one or more members, rather than being available for use by the LLP, that may indicate that the contribution is not genuine or at real risk.  

This does not however mean that HMRC would consider that a contribution was not genuine or at real risk if the LLP did not require additional capital before it was made (for example if it was already well capitalised). HMRC also recognises that LLPs may put contributions to a variety of commercial uses, including satisfying regulatory capital requirements. But if the contribution is not intended to provide funding which is available for use by the LLP, for example because it is ringfenced for the benefit of the member(s) or the reality is that the money makes its way back to the member(s) as part of a circular arrangement, that would indicate it is not a genuine contribution or at real risk.