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HMRC internal manual

Employment Status Manual

HM Revenue & Customs
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Salaried Member: Disguised Salary: Profit share

ITTOIA/S863B (3)

Condition A is not met if it is reasonable to expect that the member has a reward package under which more than 20% of their reward for services will be a share of the overall profits of the business.

A share of the profit of the business does not include an amount determined only by reference to the success of a particular part of the business, such as a shop or branch office, or only by reference to how well an individual’s own client portfolio has performed.

For the purposes of Condition A it must be a share of profit which varies by reference to the profits of the business as a whole.


Example 1

This example illustrates the allocation of profits among members who do not receive fixed shares.


A, B and C are members of ABC LLP. A is allocated 2 points and B and C are each allocated 4 points. This means that, regardless of the level of profits, A will receive 20%, while B and C will receive 40% each.


None of the members receive a Disguised Salary; they each have a variable interest in the overall profits of the LLP. This would be so even if the profits were highly predictable and did not vary from year to year.

There can be significant variations in the mechanism used to allocate the profits. It is important not to focus on how the mechanism is described; it may be called a percentage, worked out as points or units. If the shares or units which are awarded are amounts which might reasonably be expected to vary with the profits of the business as a whole, the individual is not receiving a Disguised Salary.


Example 2

This example illustrates the position of an individual moving from Salaried Member to partner status.


Member F was a Salaried Member, with a fixed profit share of £100,000.

Member F is promoted with effect from 1 April 2015. She will have a fixed profit share of £50,000 together with 10 profit units which the firm estimates will be worth an additional £75,000 based on budget. The firm has a very poor year, and as a result, she only receives £50,000, giving total profit share of £100,000.

Condition A is not met. Member F is not a Salaried Member from 1 April 2015.


Member F may have had the same profit share as last year, but half of this was dependent on the overall profits of the business. Had the firm been as successful as forecast, then she would have a profit share of £125,000.

It is important to take a realistic view of the facts, for guidance on this see ESM61090.

How what is a profit share is affected by unexpected events is considered in ESM61095.

For guidance on what is sometimes described as a “benchmark” approach see ESM61100.