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HMRC internal manual

Employment Status Manual

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HM Revenue & Customs
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Salaried Member: Condition C: What is the contribution?

ITTOIA/S863E (2)

The amount of capital contribution is based on the amount that the individual has invested as capital at that time in accordance with the LLP Agreement.

The capital of the LLP is the amount of money or other property that all the members have contributed in accordance with the LLP Agreement, to the permanent endowment of the firm.

As part of the LLP agreement, the amount of capital contributed cannot be varied by the Individual Member alone, any variation has to be by agreement of all of the LLP members.

The capital of the LLP is not the same as the assets of the LLP which includes everything with a money value and varies from day to day.

Current Account

In addition to their capital, the member is likely to have what is sometimes called a current account. This account reflects the member’s day-to-day balance with the firm reflecting things such as the member’s entitlement to a profit share, tax account and drawings.

The current account balance is not capital contributed.

An undrawn profit share is not capital, but the members can agree to convert it into capital just as they can agree to pay a further sum in as capital.

Exclusions:

If the member is, or may be entitled to draw a sum out before they cease to be a member then that sum does not count as part of their capital contribution.

One situation that this will apply to is where the amount of contribution is on a sliding scale linked to the size of the profit share

 

Example 1

*The OPQ LLP operates a sliding scale of contributions. The position is periodically reviewed and if a member no longer meets the criteria, then the appropriate amount of capital is refunded. *

The amount that is potentially refundable is not taken into account in applying the test for Condition C. The members may be entitled to have the sum refunded.

If the member is, or may be, entitled to require someone to reimburse a sum, then that sum does not count as part of their capital contribution.

Reimburse takes its everyday meaning which is “to pay what has been paid”.

 

  • If the member is able to take out insurance to cover a possible loss of capital then the sum covered is not capital contributed for the purposes of Condition C.

 

  • If there is an agreement under which the member may receive a payment if the LLP fails and the capital contributed is not repaid then that sum does not count as part of their capital contribution.

 

Summary

The member’s capital does not take into account:

  • sums that the Individual Member may be called upon to pay at some future date;
  • undrawn profits unless by agreement they have been converted into capital;

 

  • sums that are held by the LLP for the Individual Member, for example, sums held in a taxation account; or
  • amounts of capital that are part of arrangements to enable the Individual Member to “avoid” being a Salaried Member where there is no intention that they have permanent effect or otherwise give rise to no economic risk to the Individual Member.

 

Example 2

This is an example of the treatment of some different types of “capital contribution” and their effects on Condition C.

P has:

  • £10,000 contributed as capital in accordance with the LLP Agreement;
  • £50,000 long term “loan”. Interest is paid on this, but otherwise the amount is held on terms comparable to the capital, e.g. the loan is only repayable when P resigns, or the LLP is wound up The amount is treated for tax purposes as a share of the profit;
  • £30,000 as a short term loan for a two year term;
  • £25,000 undrawn profits – that can be withdrawn at any time; and
  • £25,000 in a tax reserve current account to pay the tax on P’s profit share.

 

P is entitled to withdraw the short term loan, undrawn profits and the sum in the tax reserve current account, whilst he remains a member. These are not part of the capital contributed. P cannot withdraw either the sum described as capital or that described as a “loan”. Regardless of the terminology used in the agreement, these are both intended for the long term financing of the firm. They act as partnership capital. P has capital of £60,000.

However, giving a guarantee is not partnership capital.

If the agreement provides that member could be entitled to withdraw the capital, then the sum is not capital contributed for the purposes of Condition C.