New Changes for LLP salaried member rules
HMRC has updated its guidance on salaried members, which could have significant implications for members of limited liability partnerships (LLPs). While this update doesn’t reflect a change in legislation, it offers insight into HMRC’s interpretation of existing laws and serves as a reminder for LLPs to follow the proper guidelines for salaried members. Before the introduction of the salaried member rules, some individuals were appointed as LLP members and were automatically taxed as self-employed, despite functioning more like employees in practice. This update underscores the need for LLPs to ensure that their members are classified correctly for tax purposes. What are the Salaried Member Rules? The salaried member rules, introduced in 2014, apply specifically to members of limited liability partnerships (LLPs), not to general partnerships or limited partnerships. These rules establish three conditions—A, B, and C—that determine when an individual should be considered more like an employee than a partner. The rules apply where all three conditions are met: The assessment of whether Condition A applies is forward-looking, based on current arrangements. Disguised salary encompasses payments for services that are not linked to LLP profits and includes amounts unlikely to be influenced by profit variations. For example, some LLPs pay members a fixed profit share, such as £75,000 annually, which is guaranteed unless the firm performs very poorly. Although this fixed share isn’t strictly guaranteed, it is reasonably stable and thus considered a disguised salary. However, anticipated profit shares, which adjust based on actual profits and may result in either additional profits or a debt to the firm, are not classified as disguised salaries. These are viewed as profit shares accessed through drawings rather than fixed salaries. Members with significant influence are typically those engaged in overall management or senior roles with the authority to impact the firm’s strategic direction, even if they aren’t involved in daily operations. Capital contributions are typically well-documented. For new members, the test is based on their committed capital contribution at the time of joining. Members who joined before April 6, 2014, must have an agreement to contribute capital within three months to satisfy Condition C. Those who joined on or after April 6, 2014, have a two-month period to provide the capital, provided they had a commitment to contribute from the start of their membership. These rules are intended to prevent PAYE implications during the brief period when members are arranging their capital contributions. The rules include several anti-avoidance measures, one of the most important being that if arrangements are made with the primary purpose of circumventing the salaried member rules, those conditions will be disregarded. Many LLPs have structured their members’ capital arrangements to ensure they clearly fail to meet Condition C. Often, LLP agreements required all members to maintain a capital account equal to at least 25% (or more, if a buffer was deemed necessary) of any ‘disguised salary’ they were expected to receive during the year. This approach—provided that the member genuinely had capital at risk within the LLP, thereby taking on the characteristics of a partner in a general partnership—was always considered reasonable and not likely to trigger the anti-avoidance provisions. The recent update to the HMRC manual, which clarified the Salaried Member Rules, may signal a particular area of focus for future compliance reviews. While this has raised some concerns, the update simply reinforces what LLPs should already be doing. If your business operates as an LLP, it’s crucial to regularly review your agreements and ensure that you are correctly applying HMRC’s provisions.
UK Inflation Hits Bank of England’s 2% Target for First Time in Nearly Three Years
Inflation in the UK has fallen to the Bank of England’s target rate of 2% for the first time in nearly three years. The Office for National Statistics reported that the Consumer Prices Index (CPI) decreased to 2% in the year to May. This is down from 2.3% the previous month. This drop was largely driven by a significant decrease in food prices. This decline means that prices are rising at a much slower rate than they have over the past few years during the cost-of-living crisis. It marks the first time since July 2021 that inflation has hit the Bank of England’s target. This follows a period in which inflation soared to levels not seen in 40 years. Prime Minister Rishi Sunak was quick to declare victory on inflation last month. This is despite predictions that it would fall sharply as rising energy and food costs subsided. Sunak took credit for the decrease, claiming that it was further evidence that the “economy has now turned a corner.” Services price inflation, which the Bank of England considers a better indicator of medium-term inflation risk, fell by 0.2% to 5.7%. However, this was still above the 5.5% expected by economists. Despite this decline, very few economists believe the Bank of England will reduce its main interest rate from 5.25% on Thursday. Many policymakers are concerned about the persistent inflation in the services sector and the rate at which wages are increasing, which could raise the risk of an inflation rebound if interest rates are cut too soon. The consensus in financial markets is that rates will be cut in August. The Bank of England, like other central banks, aggressively increased interest rates from near zero in late 2021 to counter the rapid rise in inflation, which had surged above 11%. Higher interest rates have cooled the economy by making borrowing more expensive, which has helped to ease inflation. However, this has also meant that the British economy has barely grown since the pandemic rebound. The outlook remains uncertain. The Bank of England will likely wait for further signs of inflation being under control before considering a rate cut.