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HMRC’s New Guidelines for LLPs Raise Concerns

Recently, HM Revenue and Customs (HMRC) updated its guidelines to explain how members of Limited Liability Partnerships (LLPs) are taxed. The goal of these updates is to provide clarity on the tax status of LLP members. However, these changes have sparked discussions and concerns among both tax professionals and businesses.

What Makes an LLP Member an Employee?

In 2014, HMRC implemented regulations that identify certain LLP members as employees for tax purposes. This means that they are required to pay employment taxes, such as PAYE (Pay As You Earn) and National Insurance Contributions (NICs) as if they were regular employees. They will no longer be taxed as self-employed individuals.

Three conditions determine whether an LLP member is considered an employee.

  • Condition A - At least 80% of the member's payment from the LLP is considered a "disguised salary," meaning it's fixed and not dependent on the LLP's overall profits.
  • Condition B - The member does not have significant control over the operations of the LLP.
  • Condition C - The member's capital contribution to the LLP is less than 25% of their disguised salary.

If an individual meets all three conditions, they are considered employees for tax purposes. Otherwise, they are treated as self-employed.

Details of HMRC v BlueCrest Case

The HMRC v BlueCrest case was a tax dispute involving whether an LLP member should be classified as an employee for tax purposes. The case focused on two of three conditions (Conditions A and B) used to make this determination. While both sides had victories, the case did not set a binding judgment for future cases.

HMRC changes guidelines for LLPs.

The main point of the case was Condition B, which deals with whether an individual has significant influence over the affairs of the LLP. Additionally, there was discussion about whether BlueCrest's method of distributing profits was enough to fail Condition A.

The First Tier Tribunal (FTT) judge indicated that he would have applied the Targeted Anti-Avoidance Rule (TAAR) to BlueCrest's attempt to circumvent Condition A. However, this statement is considered obiter dicta and is not legally binding.

The concern is that this remark might still influence HMRC's future decisions in similar cases, potentially impacting how taxpayers approach similar situations in the future.

How Has HMRC Changed LLP Guidelines?

The HMRC guidelines for Limited Liability Partnership (LLP) members to be regarded as employees were initially accompanied by an anti-avoidance rule, which stated that an arrangement would not be considered valid if its primary purpose was to avoid these regulations.

Recently, HM Revenue and Customs (HMRC) updated its guidelines, particularly focusing on two aspects.

  • Anti-avoidance - Even if an individual genuinely contributes capital to the LLP, the anti-avoidance rule can still apply if the main purpose of their arrangement is to avoid employee classification.
  • Capital Contribution - HMRC provided an example of how changing capital contributions can affect a member's compliance with Condition C. The example demonstrated that if a member periodically increases their capital contribution to stay below the 25% threshold in comparison to their hidden salary, it will trigger the anti-avoidance rule. This means that the increased capital will not be considered when determining whether the member meets Condition C.
LLP members will be treated as employees within 3 conditions.

There are concerns about an update from HMRC because it suggests a change in their approach. Previously, people mostly treated Conditions A and C as simple mathematical tests. Moreover, HMRC indicated that genuine capital in an LLP would be accepted when determining if Condition C has failed. However, the recent example provided by HMRC needs to clarify whether the increased capital contributes to real risk or is enduring. This lack of clarity leaves taxpayers needing clarification about how to interpret the changes.


HMRC’s new guidelines for LLPs have created a new landscape of tax compliance and risk management for taxpayers. These updates have been made to provide clarity and address potential loopholes, but they have also raised concerns about the interpretation and application of tax rules. To ensure compliance and navigate the complexities of the tax terrain, businesses and tax professionals must seek expert guidance on Limited Liability Partnerships (LLPs) and stay up to date with evolving tax regulations.

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