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HMRC internal manual

Partnership Manual

Condition A- overview

This section provides an overview of Condition A, with links through to the more detailed guidance.

 

Policy Aim

Condition A is intended to identify those members who are working for the LLP and are rewarded like employees; that is, they are paid for their services substantially without reference to the overall profitability of the firm.

Their level of reward may vary, just as the rewards received by many employees varies through salary increases and bonuses. What matters is that any such variation is not determined by reference to the firm’s profits as a whole.

 

What does Condition A do?

Condition A requires the LLP to consider the position of members who, in their capacity as members, are remunerated for performing services for the firm, and to decide if their remuneration is, in substance, a “Disguised Salary” rather than a profit share.

Condition A is met where it is reasonable to expect that at least 80% of the total amount payable by the LLP for the individual’s services in individual’s capacity as a member of the LLP will be “Disguised Salary”.

 

What is Disguised Salary?

An amount within the total amount is Disguised Salary if:

  • it is fixed; or
  • it is variable, but varied without reference to the overall amount of the profits or losses of the LLP; or
  •  it is not, in practice, affected by the overall profits or losses of the LLP.

Basically if the reward is fixed or varies as a result of personal performance or the profits of a part of the business, then it is Disguised Salary, for further guidance see PM255600.

 

If the reward varies with the overall profits of the firm then it is not Disguised Salary, for guidance on what is a profit share see PM255900.

 

It should be noted that payments made on account of an expected profit share are not Disguised Salary. These sums are only contingently paid and will later be tallied with actual profits (so as to give rise either to a right to further profit or a debt owed to the firm). In such a case, the reward for services is a profit share (with the drawings being the means by which the profit is accessed). For guidance on this see PM255680.

 

When is the test applied?

This test is applied “looking forward” (see PM255300) on the basis of the arrangements (see PM255200) in force at the time that it is being determined whether the Condition is met.

 

As the test is “looking forward”, it is applied on the basis of what it is reasonable to expect (see PM255500) the outcome to be. The test is not reapplied simply because the events do not turn out as expected.

 

The test is reapplied at the time when it was expected that the arrangements would end, or if the arrangements change before then.

For more information on when to apply the test see PM255400.

 

For an example of how to apply Condition A see below:

 

Example

This example illustrates the application of Condition A and the process of determining if the condition applies

 

M becomes a member of an LLP on 1 July 2014 and arrangements are made that in return for working for the LLP, M will receive a fixed salary for the period from 1 July 2014 to 30 June 2015. It is expected that a new annual arrangement will be put in place from 1 July 2015.

 

The relevant time at which Condition A is to be determined is 1 July 2014 being the date when M became a member and the relevant arrangements were put in place.

 

The relevant arrangements are the remuneration arrangements for the period from 1 July 2014 to 30 June 2015. The items to look at are the LLP agreement, including any personal terms agreed with M and also whether these reflect what will happen in practice, see PM255200.

 

The relevant period is from 1 July 2014 to 30 June 2015, the latter date being the date on which it is expected that the arrangements will end, see PM255300.

 

M’s services are the work that M will do for the LLP in the capacity as a member in the period from 1 July 2014 to 30 June 2015.

On 1 July 2014, it is expected that M will receive a fixed salary for the period from 1 July 2014 to 30 June 2015.

 

It is therefore reasonable to expect that at least 80% of the amount payable for M’s services under the arrangements in place for that period will be Disguised Salary and Condition A will be met.

 

The determination will apply until the end of the 30 June 2015 unless the relevant arrangements change during the period.