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HMRC internal manual

Employment Status Manual

Salaried Member: Disguised Salary: Divisions of a business

ITTOIA/S863B (3)

A Disguised Salary comprises fixed amounts and amounts that are determined without reference to, or are not in practice affected by, the overall level of profits or losses for the LLP as a whole.

As a result, a Disguised Salary includes sums based upon the profits of a part of the business.

The fact that the amount the member receives varies does not change the position. The sum does not vary with the overall profits of the LLP.

If a member is be rewarded by:

  1. a fixed amount plus
  2. a bonus calculated exclusively on the basis of the success of a particular branch or unit,

then Condition A is satisfied.

On the other hand, if the member is to be rewarded on a basis that takes into account the overall profitability of the firm, then (assuming the 80% test is not met in respect of any fixed entitlement the member may have) Condition A will not be met even if the reward also reflects personal performance or the performance of the division in which he or she works.

*Example *

This distinction is illustrated by the example below.


ABC LLP carries on a financial services business with two divisions; tax and audit. Hank and Mitch run the audit division and Toni and Jo run the tax division. All four are members in the firm. The two divisions keep separate accounts. It is reasonable to expect both divisions to be profitable.


Whether Condition A is met depends on all the arrangements and a relevant factor will be what would happen in the event of a loss being made by either business.

If, for example, the LLP agreement provides that each division is effectively insulated from the results of the other (profits or losses) when calculating the allocations to the members then all the members meet Condition A.

Alternatively the remuneration package may provide that the profits and losses of each division are to be aggregated (after deduction of common overheads) so as to give a single figure of net profit for the overall business, which is then shared between the divisions, with those shares then being further allocated to the individuals in each.

Such shares may take into account personal and divisional performance as well as other factors, but with none of the members having a fixed entitlement to any of the divisional shares.

In this latter case, none of the members meets Condition A. Each division receives a share of profits allocated by reference to performance and each individual then receives a share of that share. Thus the amount that each individual receives varies with reference to the overall profits of the business (and is in practice affected by the amount of those profits).