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HMRC internal manual

Employment Status Manual

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HM Revenue & Customs
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Salaried Members: Anti-Avoidance: Financing arrangements

ITTOIA/S863G

This section looks at how the anti-avoidance provisions apply where a member obtains finance to fund a capital contribution to the LLP that results in the member failing Condition C.

An individual will fail condition C if the individual has made a contribution 25% or more of any Disguised Salary payable in the tax year.

The capital contribution requirement is fairly prescriptive. a genuine contribution made by the individual to the LLP, intended to be enduring and giving rise to real risk, will not trigger the TAAR, see ESM64020.

Such a contribution may be funded through a loan from a third party, typically a bank. The firm might itself arrange the loan through a partnership facility. Provided that the debt will then be that of the individual partner, a loan from a third party arranged through the firm will not trigger the TAAR.

It is a question of fact as to whether a main purpose of the arrangement was to secure that the individual was not a Salaried Member, but it is likely that the TAAR will be in point if the contribution is provided as part of an arrangement where the following features are present (noting this is not an exhaustive list):

  • It derives from a non-recourse or limited recourse loan, see ESM64025.

 

  • The LLP, or a body connected with the LLP, loans the money back to the individual.
  • The firm, rather than the individual member, pays or otherwise bears the cost of the interest on the loan. The firm does not bear the cost simply because it pays the interest as agent for the member (including where that payment is from a priority profit share created for the member as a consequence of the capital contribution).
  • An individual is to be brought into the LLP for a fixed term assignment and it reasonable to assume that the capital contribution has been made so that the individual fails the test for the duration of that assignment. See ESM64040.
  • The funds derive from the firm itself or from a body connected with the LLP (for example, there is a loan from the LLP to the individual or from a bank as part of an arrangement where there is to be a reduction in the firm’s indebtedness to the bank). See ESM64035.

 

As regards the final bullet, a member’s capital contribution will in many cases necessarily end up in the firm’s bank account and, if the firm is overdrawn or otherwise in debit, have the effect of reducing the firm’s debt to the bank. Provided that there is no reduction to the firm’s borrowing limit as a result of the partner loan (that is the firm can redraw the relevant amount), HMRC would not seek to apply the TAAR unless there were other offending features (e.g. the partner loan was limited recourse).

On the other hand, HMRC would consider the TAAR to be relevant in the following situations:

  • The LLP has borrowed up to its facility limit and a condition of the loan to the individual member is that the contribution is used to repay a portion of the drawn facility so that the overall lending is not increased (with the relevant amount not being capable of being redrawn by the firm);
  • The firm has not yet borrowed up to the facility limit, but the firm’s facility limit is required to be reduced as a consequence of the loan to the individual; or
  • A condition of the loan being made is that the money will end up and remain with the lending bank.

For further information see ESM64030.