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HMRC internal manual

Employment Status Manual

Salaried Member: Condition A: Relevant Period

ITTOIA/S863B (3)

An important point is that Condition A is applied looking forward.

The period that is taken into account is not a fixed period of time. The test is applied looking forward over the “relevant period”; that is the period over which it is reasonable to expect that the relevant arrangements will remain in place unchanged. For guidance on what are relevant arrangements, see ESM61010.

The length of the relevant period depends upon the facts of the case, reflecting business variations.

However, for most LLP businesses including those within the professional services sector, the relevant period will be a year as it is customary for remuneration arrangements to be reviewed on an annual basis.

Once an arrangement is made, and a reasonable view has been taken on the basis of the arrangement as to the status of the member for tax purposes, the view remains valid until the arrangement changes with the result that a new arrangement comes into existence or the relevant period to which the test was applied comes to an end but the arrangements continue.

Example 1

This example looks at a case where the reward arrangements are based on a period longer than a year because the package is for a project that is expected to take several years.

John is a member in an LLP which has entered into an agreement on 1 January 2015 to develop a property over a three year period. The agreement provides that John will receive a fixed profit share of £100,000 per year for the first two years and then 50% of the profit from the development, expected to be £500,000 in total. This arrangement is not changed.

 John is not a Salaried Member because, viewed at the outset and taking into consideration the whole three year period, the fixed amount      payable to John is expected to be less than 80% of his total profit so Condition A will not be met.

If we look again at the example above and consider the position in year 3: assume that the property market slumps and the expected profit does not materialise. John leaves the LLP with nothing other than the fixed profit amounts from years 1 and 2.

Although, as events have turned out, John has received only a salary, this is only the result of an extraneous event. As the parties expected and intended for John primarily to be rewarded through a share in the overall profits of the LLP, John is not at any time a Salaried Member.