Not all LLP members are taxed as partners. HMRC may treat them as employees if they meet certain conditions. Here's how the salaried member rules work, what the three-part test involves, and who’s excluded from the legislation.

The salaried member legislation can apply to certain members of a Limited Liability Partnership (LLP). This can happen where HMRC consider that a member of an LLP is not a risk-taking partner and can be re-classified as a salaried member.

Prior to 2014, all individual members of an LLP were taxed as if they were a partner. The salaried member legislation brought in new provisions that means that individual members of an LLP are effectively treated as employees for tax purposes.

The legislation includes a three-part test to see if LLP members should be taxed as salaried members. If all three parts apply, then the member will be considered a salaried member.

In a simplified format they are:

• Condition A: a member’s regular payments from the LLP have the characteristics of a “disguised salary”, i.e., at least 80% of the member's pay is fixed or if variable do not vary in line with actual profits and losses of the LLP.
• Condition B: a member has no significant influence over the affairs of the LLP.
• Condition C: a member’s capital stake in the business is less than 25% of their expected reward package.

As long as an LLP member is able to demonstrate that at least one of the three conditions does not apply to their circumstances, they will continue to enjoy the status of a regular partner. HMRC’s internal manuals include a number of examples to help clarify how these rules are applied in practice.

This means that the salaried member provisions do not apply to:

• companies
• individuals who do no more than invest money
• individuals who no longer perform services for the LLP but who continue to receive a profit share.