Background on Condition C

Condition C is a critical aspect of the salaried member rules for Limited Liability Partnerships (LLPs). According to HMRC’s guidance, where an LLP member’s fixed profit share exceeds 25% of their total remuneration and is directly linked to their fixed capital contribution in the business, they are considered to be self-employed.

February 2024 guidance

HMRC’s February 2024 guidance suggested that ‘top-ups’ of a member’s capital contribution could be subject to closer scrutiny to ensure their legitimacy. For example:

In 2018, upon joining ABC LLP, member X contributed capital of £15,000. This was a genuine contribution and not part of any arrangement to avoid the salaried members rules.

In 2022, X’s expected remuneration was £100,000 (including salary, drawings and bonuses), placing their contributed capital below the 25% threshold, thereby meeting Condition C. Under HMRC’s rules, remuneration that is fixed, variable but predictable, or otherwise determined in a way that lacks risk is considered disguised salary. Since X’s expected remuneration met these criteria, it was classified as disguised salary under Condition C.

X then contributed an additional £10,000 as part of a separate arrangement with the LLP to periodically increase their capital contribution in response to their expected disguised salary, ensuring their capital remained above the 25% threshold to avoid meeting Condition C.

This arrangement would trigger the Targeted Anti-Avoidance Rule (TAAR), and the additional £10,000 would be seen as non-enduring. The rules, as first confirmed in X’s case, suggest that only £15,000 would be considered a genuine contribution. Therefore, X would not qualify as self-employed and would instead be treated as employed.

Revised guidance

HMRC’s revised guidance now confirms that genuine capital contributions which give rise to ‘real risk’ will not trigger the anti-avoidance rule. The key points are:

Genuine contributions: Contributions must be genuine, intended to be enduring, and at real risk within the ordinary meaning of those words.

Real risk: This refers to the individual’s personal risk of losing the contribution if the LLP makes a loss or becomes insolvent, not the LLP’s overall risk of insolvency.

This clarification is significant, as it ensures that legitimate capital contributions made by members are not unduly scrutinised if there is a risk of capital loss from their contribution.

The updated guidance provides much-needed clarity and reassurance for LLP members and firms. By focusing on the genuineness and real risk of capital contributions, HMRC aims to safeguard self-employed tax status for legitimate LLP members while preventing abuse of the rules.

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