Salaried member rules: capital contributions

"Update: HMRC further updated their guidance in 2025 to make it clear that contributions that are genuine, enduring and involve real risk to the member making the contribution should not fall within the anti-avoidance rules. See our updated article Salaried member rules: updated guidance."

Recent updates to HMRC’s manuals indicate that HMRC will seek to apply salaried member anti-avoidance rules where partners make capital contributions with a view to ensuring that they do not fall within the scope of those rules. In these circumstances, HMRC indicate that they will not have regard to any additional capital contributions when determining whether the salaried member rules apply. The change in guidance appears to represent a significant and controversial shift in policy by HMRC.

Background

The salaried member rules (contained in ITTOIA 2005 sections 863A to 863G) were introduced in 2014 and designed to remove the presumption of self-employment for some members of LLPs and so tackle the disguising of employment relationships through LLPs. The rules apply where HMRC determines that the nature of the relationship between a member and the LLP with which they are concerned meets each of three conditions. Failure to meet one or more of such conditions will mean that the relevant member continued to be taxed on the basis of self-employment, rather than employment.

Condition C relates to the size of an individual member's capital contribution to the LLP. An individual will fail condition C (and so fall outside the rules) if the individual has made a contribution 25% or more of any disguised salary payable in the tax year. Accordingly, it has been considered appropriate for members to make additional capital contributions in order to stay outside the scope of the rules.

HMRC guidance

HMRC has recently updated its guidance to indicate that it will now consider that an increase in capital made by a member with a view to failing Condition C can be treated as falling within anti-avoidance rules. These rules will apply where the main purpose (or a main purpose) of any arrangements is to secure that the salaried member rules do not apply (s.863G(1)). As the guidance at PM259100 states, “The anti-avoidance legislation is intended to prevent people using artificial structures or arrangements to place members outside the scope of the Salaried Member provisions”.

The guidance (at PM259310 and PM259200) accepts that a “genuine contribution” made at the time of becoming a member of an LLP will not be caught by the anti-avoidance rules. However a contribution “where members increase their capital contribution periodically in response to their expected disguised salary, in order to avoid meeting Condition C” will fall within the anti-avoidance rules. As such, no regard will be given to any additional capital contribution in these circumstances when considering whether the member meets Condition C.

The updated guidance appears internally inconsistent with existing guidance that has not (yet) been amended. For example, the guidance at PM258200 summarising the position as follows:
“The member’s capital does not take into account:

• sums that the Individual Member may be called upon to pay at some future date;
• undrawn profits unless by agreement they have been converted into capital;
• sums that are held by the LLP for the Individual Member, for example, sums held in a taxation account; or
• amounts of capital that are part of arrangements to enable the Individual Member to “avoid” being a Salaried Member where there is no intention that they have permanent effect or otherwise give rise to no economic risk to the Individual Member.” [emphasis added]

This guidance implies that a contribution which has permanent effect or gives rise to economic risk will be treated as genuine capital, regardless of the purpose for which it is made.

Comment

The change in guidance comes as a surprise and appears to be an aggressive application of the anti-avoidance rules to say the least. To ignore genuine and lasting capital contributions to the capital of the LLP having real and significant business and commercial consequences on the basis of the anti-avoidance rules is controversial. As the guidance states elsewhere (PM259305), “The capital contribution requirement is fairly prescriptive. 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”.

The new approach appears to very much contradict that broader guidance where the focus was on the genuineness of the nature of the capital contribution as an investment in the LLP and the making of that investment by the individual concerned. As such, it appears likely that the new guidance will be challenged by members affected by this change of policy.