PM255400 - When to apply condition A
ITTOIA/S863B(1)
The test for Condition A is first applied:
- at 6 April 2014, if the individual is already a member of the LLP on that date; or
- when the individual becomes a member of the LLP.
Re-applying the test
Normally, the test for Condition A is re-applied at the earlier of when:
- the remuneration arrangements are changed; or
- the relevant period, over which the test was applied, ends.
A change would occur when, for example, the individual’s remuneration arrangement changes or the firm’s remuneration policy is altered.
Example 1
This looks at the position where new arrangements are entered into before the end of the relevant period.
The facts are as in Example 2, but the property development is completed ahead of schedule. The LLP decides to take on a new development and as a consequence, on 1 September 2016, John agrees a new arrangement which will see him receive £100,000 in the first year, and a profit share, estimated at £150,000 in 2018.
The existing arrangements are changed so Condition A has to be re-tested on 1 September 2016, when the change occurs.
Unexpected events
An extraneous event (such as a revised profit forecast) that affects the expectation of the parties to the arrangement, but which does not result in the arrangement being altered, would not result in the arrangement being revisited. This means that Condition A would not need to be retested at that point.
Contingent events
In addition, where the remuneration arrangement makes provision for contingent events such as sick leave or maternity pay, a change to payment terms triggered by one of these contingencies would not constitute a change to the arrangements.
By contrast, if the LLP or members reacted to such a change by altering the remuneration agreement, this would constitute a new remuneration arrangement and the test under Condition A would then have to be reassessed.
What happens if the relevant period ends and the arrangement continues?
As previously mentioned, apart from a modification to an existing remuneration arrangement or a new arrangement, the other point at which Condition A will need to be re-tested is immediately after the end of the “relevant period”. This is the period which ends at the time when it was expected that the original arrangements would end or be modified. Very often, remuneration arrangements are determined annually.
However, the period can be longer. And in some cases, an arrangement may continue for longer than expected without being modified. In this case, a new relevant period then begins.
Example 2
This looks at where the relevant period ends but the arrangements are unchanged.
The facts are as in Example 2, but the property development is delayed by bad weather. The arrangements continue unchanged, with John receiving 50% of the profits. The only difference is that the profits are spread out over a longer period. The final sale is made four months after the end of the relevant period.
Although the arrangements continue unchanged, the relevant period has come to an end. As John is still receiving a 50% profit share, Condition A is not met.
As before, the fact that part of the profit share did not materialise in the relevant period has no relevance. The test was properly applied on the basis of the information held at that time. It is applied again immediately after the relevant period with, in this case, the same result for the extra four months.