HMRC has provided more details of the three conditions which will determine whether or not LLP members are treated as an employee for tax purposes, namely disguised salary, significant influence and capital contribution.

The guidance now makes clear that the new rules apply where it is reasonable to expect that at least 80% of the amounts payable by the LLP for the member’s services – excluding benefits in kind - will be disguised salary. This provides a statutory definition of the phrase ‘wholly and substantially’ which HMRC originally used. The guidance also confirms that drawings on account of an eventual profit share will not of themselves be treated as a fixed profit share as they will be later tallied up with the actual profits.

The second condition is having ‘significant influence’ over the affairs of the partnership. The guidelines state that this includes those are involved in the management of the business as a whole, or senior members who may have little interest in day-to-day management – which they leave to others – ‘but their roles and rights mean that they can exert significant influence over the business as a whole’.

George Bull, chair of the professional practices group at Baker Tilly, said: ‘Predictably, this test continues to be hard work for HMRC. Although the revised notes attempt to recognise the realities of life for a member of a professional LLP, there will be many circumstances in which a member cannot show that he or she has significant influence over the affairs of the LLP.’

The final test of being a ‘true partner’ is making a capital contribution of at least 25% of fixed pay to the LLP's capital. In response to concerns raised by professional firms and banks about the difficulty of making the necessary financial arrangements for this by 6 April, HMRC is now offering a relaxation of the rules so that a ‘firm commitment in place’ by 6 April 2014 to contribute capital within three months will be taken into account. Members who join an LLP after 6 April 2014 will have two months to introduce capital.

However, Bull is warning that firms must take care to ensure that they are not caught by new anti-avoidance rules when partners make capital contributions.

‘Firms relying on the period of grace to take in new capital on or before 5 July 2014 will need to exercise particular care and be able to show that the use of the money received by the LLP has been considered separately by the firm’s management and is not simply following a flow back to the bank in line with terms set down by the bank when the loan agreements were made,’ Bull said.

Bull also pointed out that conditions attached by the bank to new partner capital loans could potentially defeat their purpose – for example a requirement by the bank that new partner capital can only be used to reduce the LLP’s indebtedness to the bank.

Catherine Robins of law firm Pinsent Masons, said that the revised proposals affect many professional services firms, who would not have been caught by the original proposals.

‘With many partners needing to fund their contribution by bank borrowing, having the funds in place by 6 April was going to be extremely difficult to achieve. Indeed, even a three-month grace period may be challenging, given the number of firms looking to restructure and the fact that the banks are not as keen to lend as they once were,’ Robins said.

Firms will have to decide from 6 April whether they need to apply PAYE in relation to payments made to their members. However, Robins points out that at this point the legislation may not be in final form and they cannot obtain a clearance from HMRC.

‘In many cases the application of the “significant influence” and “disguised salary” tests will not be clear-cut so there will be uncertainty for some LLPs as to how the rules impact upon them,’ Robins said.