HMRC reconsiders capital contribution stance

Members of LLPs are generally taxed as self-employed, rather than employees, which can give a significant saving in NICs. The salaried members’ legislation taxes members as employees in some circumstances, generally where their work relationship is similar to an employment relationship.

Under the salaried members’ legislation, if three specific conditions are met then a member will be taxed as an employee. These anti-avoidance rules have caused some confusion.

HMRC has recently concluded an internal review of its guidance on one of these conditions, condition C.

This condition is met if a member’s capital contribution to the LLP is less than 25% of the amount assessed as ‘disguised salary’ that would be paid to a member in a particular tax year.

In the course of business, members may often alter the level of their capital contribution. Members concerned about the rules will generally ensure that their capital contribution changes so that this condition is not met. In our experience, HMRC has generally not sought to apply the targeted anti-avoidance rule (TAAR) in the context of UK LLPs where members have made capital contributions on an enduring basis and have genuine financial risk.

In 2024, HMRC released an update to its guidance, which suggested that where a member increased their capital contribution because their compensation had risen, that increase in capital could be disregarded for the purposes of condition C. This was on the basis that it fell within the TAAR.

The update to the guidance clarifies the position and is favourable for members concerned about the 2024 guidance change.

On 7 February 2025 HMRC confirmed its intention to reverse, effectively, the updated guidance released a year prior. This had caused enormous uncertainty for UK LLPs with members relying on failing condition C. In practice this included firms operating across many industries, not least in the professional services market.

The capital contribution will be looked at as it stands. Changes made due to compensation increases will not be disregarded.

HMRC will update the guidance in its partnership manual to confirm that a contribution made under a top-up arrangement will not trigger the TAAR if the arrangement results in a genuine contribution made by the individual to the LLP, intended to be enduring and giving rise to real risk.

We expect that HMRC will also consider how the contribution is used by the LLP in determining whether it is genuine and giving rise to real risk.

This update comes not long after the Court of Appeal (CA) decision in BlueCrest, which was not such good news for LLP members, with the Court of Appeal defining ‘significant influence’ more narrowly when assessing the meaning of condition B. You can read our update on the case here.

The CA has remitted the appeal to the First Tier-tribunal for reconsideration in the light of the correct construction of condition B. BlueCrest has also lodged a permission to appeal application with the Supreme Court. Uncertainty still remains and a close eye will remain on how this progresses through the Courts.

In the meantime, firms can take practical steps by reviewing:

• Their existing salaried member testing processes and associated documentation, including, but not limited to, decisions regarding the allocation of profit shares and capital contributed
• The rights and duties of the members provided for within the LLP agreement, particularly with reference to governance/decision making and control

Please do speak to your usual contact or one of the contacts listed if you would like to discuss any of the above.

Approval code: NTEH7032508