Salaried member rules: updated guidance

Following intensive discussions over recent months, HMRC has revisited its guidance on the application of the anti-avoidance rules to capital contributions made by members of an LLP in order to fall outside the salaried member rules. The changes now make it clear that the motivation for the payment is not in itself determinative of whether the anti-avoidance rules apply and that HMRC will look to whether the contributions are genuine, enduring and involve real risk to the member making the contribution.

These changes to the guidance are certainly welcome and largely return the position to the pre-2024 position.

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 had been considered appropriate for members to make additional capital contributions in order to stay outside the scope of the rules.

Anti-avoidance rules 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)). 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”.

However, in a significant and controversial shift in policy by HMRC, in March 2024 HMRC made updates to the guidance in their Manuals to indicate that they would seek to apply the anti-avoidance rules where partners make capital contributions with a view to ensuring that they do not fall within the scope of those rules – for example, “where members increase their capital contribution periodically in response to their expected disguised salary, in order to avoid meeting Condition C”. In these circumstances, HMRC indicated that they would not have regard to any such additional capital contributions when determining whether the salaried member rules apply. This was despite the fact that the new guidance seemed at odds with the broader guidance, such as PM259305, which stated that: “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”.

Further updates to guidance

On 9 April 2025, HMRC made further updates to their guidance at PM259310 and PM259200. These changes now make it clear that the motivation for the payment alone will not bring it within the anti-avoidance rules. In particular, HMRC have significantly modified the examples contained in their guidance at PM259200.

The guidance now makes it clear that it will be “a question of fact as to whether the initial 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” and that HMRC will take into account the policy intent of the legislation.

Importantly, the guidance now states that “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”. 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 guidance explains 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.

Regardless of how a contribution is funded, HMRC will also take into account how it is used by the LLP in determining whether it is genuine and giving rise to real risk. The guidance indicates that 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.”

The guidance clarifies that 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”. However, 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.

The changes bring the guidance broadly back into line with other aspects of HMRC’s guidance. 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]

Comment

The 2024 changes to the guidance came as a surprise and were clearly an aggressive application of the anti-avoidance rules to say the least. The April 2025 changes now make it clear that genuine and lasting capital contributions to the capital of the LLP which have real and significant business and commercial consequences should not engage the anti-avoidance rules, at least from HMRC’s perspective.

However, it is important to note that, as the Court of Appeal recently pointed out in BlueCrest, guidance is not a substitute for clear and unambiguous legislation (and cannot be used to construe such legislation). The guidance uses various concepts which are not used in the legislation itself and so it is unclear what, if any, value a court would put on the guidance were a case to come before a court. As such, perhaps the most that can be said is that it now looks much less likely that HMRC will seek to bring any such case.