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HMRC internal manual

Employment Status Manual

Salaried Member: Condition A: Overview

This section provides an overview of Condition A, with links through to the more detailed guidance.

Policy Aim

Condition A is intended to identify those members who are working for the LLP and are rewarded like employees; that is, they are paid for their services substantially without reference to the overall profitability of the firm.

Their level of reward may vary, just as the rewards received by many employees varies through salary increases and bonuses. What matters is that any such variation is not determined by reference to the firm’s profits as a whole.

What does Condition A do?

Condition A requires the LLP to consider the position of members who, in their capacity as members, are remunerated for performing services for the firm, and to decide if their remuneration is, in substance, a “Disguised Salary” rather than a profit share.

Condition A is met where it is reasonable to expect that at least 80% of the total amount payable by the LLP for the individual’s services in individual’s capacity as a member of the LLP will be “Disguised Salary”.

What is Disguised Salary?

An amount within the total amount is Disguised Salary if:

  • it is fixed; or
  • it is variable, but varied without reference to the overall amount of the profits or losses of the LLP; or
  • it is not, in practice, affected by the overall profits or losses of the LLP.

Basically if the reward is fixed or varies as a result of personal performance or the profits of a part of the business, then it is Disguised Salary, for further guidance see ESM61035.

If the reward varies with the overall profits of the firm then it is not Disguised Salary, for guidance on what is a profit share see ESM61085.

It should be noted that payments made on account of an expected profit share are not Disguised Salary. These sums are only contingently paid and will later be tallied with actual profits (so as to give rise either to a right to further profit or a debt owed to the firm). In such a case, the reward for services is a profit share (with the drawings being the means by which the profit is accessed). For guidance on this see ESM61075.

When is the test applied?

This test is applied “looking forward” (see ESM61020) on the basis of the arrangements (see ESM61015) in force at the time that it is being determined whether the Condition is met.

As the test is “looking forward”, it is applied on the basis of what it is reasonable to expect (see ESM61030) the outcome to be. The test is not reapplied simply because the events do not turn out as expected.

The test is reapplied at the time when it was expected that the arrangements would end, or if the arrangements change before then.

For more information on when to apply the test see ESM61025.

For an example of how to apply Condition A see ESM61010.