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HMRC internal manual

Employment Status Manual

Salaried Member: Condition C: Overview

Condition C looks at the level of investment made by an individual member in the LLP.

Condition C is not satisfied if the individual member has made a significant investment in the business so they have a real risk resting on the success or failure of the business.

The general rule is that Condition C is met if, at the relevant time, the individual member’s capital contribution to the LLP is less than 25% of the Disguised Salary expected to be payable to the member in respect of their performance during the relevant tax year.

Guidance on what the capital contribution is can be found at ESM63010.

Normally the test is applied on the basis of the capital that has been contributed. For practical reasons the position is different when a member joins an LLP (or at 6 April 2014). 

As it may take time for the member to organise finance to enable them to make the capital contribution, when they first become a member (or at 6 April 2014) Condition C is applied on the basis of the capital that the member has undertaken to contribute rather than what they have actually contributed, see ESM63045.

If they fail to make the contribution then the test is re-applied retrospectively to the date of joining (or 6 April 214), see ESM63050.

Condition C requires the capital contribution to be compared to the Disguised Salary for the relevant tax year. This may be a different figure to that determined for the purposes of Condition A, which is based on the relevant period, not the tax year.

Guidance on when the test should be applied can be found at ESM63020.

If a member joins part way through the tax year, or is expected to cease to be a member before the end of the year, the capital contribution is proportionally reduced, on a pro rata basis, before it is compared to the Disguised Salary for the tax year, guidance on this can be found at ESM63025.

The test is applied on an annual basis, if there is a change in the contribution during the year, then the test will need to be reapplied. Guidance on this is at ESM63030.

The individual may have to borrow money in order to make the capital contribution. There is no problem where there is a genuine contribution made by the individual that is intended to be enduring and gives rise to real risk.

Some types of financing arrangement will trigger the TAAR. These include:

  • Limited recourse loans
  • Loans from the LLP or from someone connected to the LLP

For guidance on the TAAR see ESM64015.