PM258400 - Becoming, or ceasing to be, a member part way through the year

S863D (8)-(10)

Condition C requires the capital contribution to be compared to the Disguised Salary for the tax year (S863D(2)).

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.

The reduction is made on the basis of the “excluded days” rule so that the contribution reflects the number of days the individual is expected to be a member of the LLP when the test is carried out. In this context, excluded days are:

  • the days in the tax year prior to the member joining the LLP, and
  • any days in the tax year after the date which M is expected to cease to be a member.

Example

This example looks at where an individual becomes a member part way through the year.

M is appointed a member three months into the tax year. His reward package means that he will be due a fixed amount of £40,000 for the rest of the tax year (this is a Disguised Salary). The terms of his membership mean that he had to make a capital contribution of £12,000.

At first sight, M’s contribution may appear to be at least 25% of his Disguised Salary

(12,000/40,000 x 100 = 30%).

However, he will only be a member for nine months of the current tax year. His capital contribution is, therefore, reduced to reflect the period of the year that he will be a member: 12,000 x (9/12) = £9,000.

When the test is applied using this reduced figure (9,000/40,000 x 100 = 22.5%), Condition C is satisfied.

Extrapolating the example to the subsequent tax year, assuming that all circumstances are expected to remain the same throughout, M’s Disguised Salary for that tax year will be £53,333 (£40,000 x 12/9). The actual capital contribution of £12,000 is compared to this figure at the start of the tax year but, clearly, the same result as in the previous year is produced (12,000/53,333 x 100 = 22.5%).