Partnership tax salaried member rules – a shift in HMRC approach?

HMRC have recently amended guidance on the partnership salaried member rules, specifically in respect of Condition C

HMRC have recently amended guidance on the partnership salaried member rules, specifically

HMRC recently amended their published guidance in relation to capital contributions and stated that the Targeted Anti-Avoidance Rule (TAAR) may apply where a member changes their capital contributions to avoid Condition C being met, by adding a new example to their Partnership Manual 259200. This change implies that HMRC may become more challenging when it comes to accepting the self-employed status of certain groups of partners. What should professional partnerships do?

It is common for professional partnerships with fixed share partners to set their capital contributions at levels equal to or slightly above 25 percent of the member’s disguised remuneration (being the amount it is reasonable to expect will be payable in the tax year, including regular performance bonuses). When remuneration increases, the capital contributed also goes up to remain at a similar percentage level. Such firms will now need to revisit these arrangements as, based on the updated guidance, it seems likely that HMRC may take the view that these additional contributions will trigger the TAAR. If the TAAR does apply, this would mean that the additional contributions would be ignored in assessing the capital contribution percentage and the member would meet Condition C.  

The application of Condition B (significant influence) would then need to be considered but, if that member does not have a management role, it seems likely that the member will be treated as a salaried member and taxed as an employee.

Given the tribunal’s interpretation of Conditions A and B of the salaried member legislation in BlueCrest it is perhaps not surprising HMRC have made amendments to their Condition C guidance. At the time of writing, there has been no accompanying communication from HMRC. However, we have seen several enquiries opened and this change has caused a level of concern both for private equity (PE) funds and professional partnerships which commonly rely on Condition C. There is ongoing engagement between representative bodies and HMRC but it is important that professional partnerships review their salaried member position in light of the potential increased scrutiny.

If you would like to discuss the implications of these changes for your organisation, please get in touch with the authors or your usual KPMG in the UK contact.