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On 21 February HMRC published updated guidance on the proposed new rules relating to Salaried Members of Limited Liability Partnerships.

The guidance contains some helpful revisions to the proposed rules and numerous examples illustrating the intended application of the rules, however some uncertainties remain. The new guidance also considers global structures in the context of the new rules. In particular members of an LLP remunerated on a cost plus basis will always satisfy the income condition.

Although the legislation will be substantially unchanged, we would hope that further consultation would be considered by HMRC up to 6 April 2014 to address further issues of concern.

The key areas updated by the new guidelines are summarised below:

Condition A: Disguised Salary

The legislation will explicitly define "wholly or substantially" as at least 80% of the amounts payable by the LLP for services performed by a member.

Condition A will be applied looking forward based on facts known at the time, but the anticipated period can exceed one year as required by the commercial outlook. For example, a new fund management business that expects to be substantially profitable and reward members with a share of those profits from year three may not meet Condition A for the first two years, even where members have a non-recourse profit allocation in those years.

The terms of reference for any discretion exercised by a remuneration committee responsible for determining bonus payments will determine whether the bonus awarded will be treated as disguised salary. Bonus payments must be a share of profits and not be amounts that are fixed or which remunerate individual performance.

A profit share calculated by reference to personal performance will not be treated as disguised salary where the amount paid is ultimately a genuine share of the overall profit of the LLP. Where profit allocation insulates members from losses of other divisions or trading units within the business or are measured by reference to revenues rather than profit, it will be treated as disguised salary.

Payments to retired members will not be treated as disguised salary where they are no longer active in the LLP. It may be more difficult to deal with a member who gradually reduces their role in the business.

Condition B: Significant Influence

No limit is placed on the number of members who can exercise significant influence. All members, more typical in smaller LLPs, may have significant influence.

The guidance includes illustrative lists of business decisions indicative of significant influence e.g. appointment of new partners, marketing strategy, business acquisitions and disposals, approving new clients or investments (especially where this is a regulatory requirement) and also those not indicating significant influence e.g. accounting, dealing with suppliers. The examples are not prescriptive or definitive. Performing a single function may not be sufficient.

It will be possible for individuals not directly involved in the overall management of the business to exert significant influence e.g. by influencing other members (retired founder member). Further, individuals who control significant business strategy e.g. senior investment professionals setting investment strategy may also exercise significant influence.

HMRC are likely to accept that members carrying out FCA Control Functions CF3 (chief executive) and CF8 (apportionment and oversight) functions in FCA regulated LLPs have significant influence. The CF4 (partner) function will be tested by reference to the facts and the function performed by the member. Merely holding a CF4 role may not be sufficient, however, a key portfolio manager in a CF4 role who also makes significant investment decisions over a fund managed by the LLP may have significant influence.

Indirect influence exercised other than as an individual member of the LLP will not be sufficient. This will have implications for individuals exercising management influence as directors of corporate members.

Condition C: Capital Contribution

Transitional rules will apply to allow a member a period of time to raise finance if required to ensure that the salaried member rules do not apply for a short period until capital is contributed. There must be an unconditional requirement for existing members to provide capital at 6 April 2014 (the contribution must be made within 3 months of that date). The same unconditional requirement will apply to new members post 6 April 2014 with (capital to be contributed within 2 months of the date of becoming a member).

Anti-avoidance rules will apply where funding for capital contributions is on a non-recourse or limited recourse basis, sourced or financed by the LLP or loaned back to the individual.

Global Structures

The guidance makes reference to the importance of the arm’s length principle in the compensation of the UK LLP. The HMRC position will be that a UK LLP compensated for services on a cost plus basis will always satisfy Condition A as the level of profits vary with reward to members rather than a reward to members which varies with profits of the LLP. This will be of major concern to LLPs providing services to affiliates compensated by reference to costs rather than revenues.

Global profit sharing will have to be carefully considered as only the profit allocation from the UK LLP will be taken into account for the purposes of the test.

Significant influence is only tested at the UK LLP level. A parent entity may express views which the member may take into account.

Evidence and Good Practice

Clarity and certainty of application of the rules will depend on preparation of realistic financial forecasts for Conditions A and C and well documented management practices for Condition B.

For further information or to discuss further please contact any of the following or your usual Throgmorton contact on +44 (0)118 939 3200: 

Neil Oliver 

24 February 2014

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About Throgmorton: Throgmorton is one of the leading companies specialising in the provision of financial and administrative outsourcing to the UK SME financial services sector.

The information in this notice is intended for general guidance only. Throgmorton does not accept any responsibility for losses incurred to any person acting or refraining to act as a result of the information in this notice. Advice should be taken in the context of specific circumstances.

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