Salaried Member Rules: When an LLP ‘Partner’ on a Development Is Taxed as an Employee

Bring in an operating partner to run a development on a fixed monthly draw, give them a small nominal capital stake, and let the capital partner keep control of the big decisions — and you have built the exact profile HMRC's salaried member rules were designed to catch. The LLP member ends up taxed as an employee, and the LLP picks up an employer's National Insurance bill it never budgeted for.

What the salaried member rules do

Since 6 April 2014, ITTOIA 2005 sections 863A to 863G have required every UK LLP to test each member against three conditions every tax year. If a member meets all three — Conditions A, B and C — they are treated as an employee for income tax and National Insurance purposes, regardless of what the LLP agreement calls them. The rules were introduced to stop firms disguising what was economically an employment relationship as a partnership share, purely to keep the member self-employed and avoid employer's National Insurance. Property development LLPs, which routinely bring in a working member to manage a site alongside a capital partner who funds it, sit squarely in the pattern the legislation targets, even though the rules were not written with developers specifically in mind.

Condition A: disguised salary

Condition A looks at what the member is expected to be paid for their services to the LLP over the tax year. It is met if substantially all of that amount is fixed, or if it varies, does not vary by reference to the overall profits or losses of the LLP, or is not in practice varying at all. HMRC's guidance treats “substantially all” as broadly 80% or more of the amount in question. A flat monthly draw dressed up as an advance against a notional profit share, where the advance in practice is never adjusted for whether the development actually makes money, satisfies Condition A comfortably.

Condition B: no significant influence

Condition B is met if the member does not have significant influence over the affairs of the LLP as a whole. A member who sits on a management board with a genuine vote on strategic decisions — funding, disposal timing, appointing contractors, taking on new projects — will usually fail this condition and stay outside the rules on that ground alone. An operating member hired to run one site, with no say over whether the LLP borrows more, sells early, or takes on the next development, typically has no such influence, however senior their day-to-day role feels on the ground.

Condition C: the 25% capital test

Condition C is met if the member's capital contribution to the LLP is less than 25% of the disguised salary they expect to receive for the tax year. A member drawing £80,000 a year needs at least £20,000 of genuine capital at risk in the LLP to avoid meeting Condition C. Capital introduced and then quietly returned, or funded by a loan from the LLP itself, does not count as real capital at risk and will not satisfy the test.

Why this catches property development JVs specifically

The classic property JV pairs a capital partner, who funds the land and build cost and wants a preferred return, with an operating partner who sources the site, runs planning, and project manages the build. If the operating partner is paid a flat fee dressed as a profit share, holds little or no capital in the vehicle, and has no real say over funding or exit — all reserved to the capital partner — every one of the three conditions is likely to be met. The result: the operating partner is taxed as an employee on income they and everyone else involved thought was self-employed profit, and the LLP is exposed to an unbudgeted employer's National Insurance liability, plus PAYE and RTI reporting obligations it was never set up to handle. Anyone weighing an LLP against the alternative company-plus-development-agreement structure for a JV should read this alongside our guide to joint venture property development tax before signing heads of terms.

Structuring around it

Only one of the three conditions needs to fail for the member to stay outside the rules. In practice, JV agreements are usually restructured around one of three levers:

• Break Condition A. Build a genuine profit-share waterfall into the operating member's return, so a meaningful slice moves up and down with the actual outturn of the development, not just a token discretionary bonus layered on top of a fixed draw.
• Break Condition B. Give the operating member a real vote, formally recorded in the LLP agreement, over at least some of the significant decisions affecting the LLP as a whole, not just delegated authority over day-to-day site matters.
• Break Condition C. Require the operating member to introduce capital equal to at least 25% of their expected fixed pay, and leave it genuinely at risk for the life of the project rather than repaying it early.

Whichever lever is used, the position needs testing at the start of each tax year, not just when the LLP agreement is first drafted — a member's expected pay, capital, or influence can drift over the life of a multi-year development in ways that flip the answer.

Common mistakes

• Assuming LLP membership is automatically self-employed status without ever running the three-condition test
• Treating a discretionary year-end bonus as enough to break Condition A when the base draw still makes up the bulk of the member's pay
• Giving an operating member a title like “managing partner” without any documented decision-making authority to back it up for Condition B
• Funding a member's capital contribution with a loan from the LLP itself, which HMRC does not treat as capital genuinely at risk
• Only reviewing member status once, at formation, rather than each tax year as the numbers change

Getting the structure right from the start

The salaried member rules are a tax and National Insurance test only — they say nothing about employment law status — but the tax consequences of getting it wrong land on the LLP as much as the member, in the form of unbudgeted employer's National Insurance and PAYE compliance going back over open years. For a JV bringing in an operating partner on anything other than a straightforward, meaningfully variable profit share, this is worth modelling before the LLP agreement is signed rather than after HMRC asks the question. It is exactly the kind of structuring decision our Property Advisory clients bring to us before a JV completes.

Common questions

What are the salaried member rules?

Rules introduced from 6 April 2014 under ITTOIA 2005 sections 863A to 863G that treat a member of a limited liability partnership as an employee for tax and National Insurance purposes if three conditions, known as Conditions A, B and C, are all met. A member caught by the rules loses self-employed status for that income and the LLP must operate PAYE and pay employer's Class 1 National Insurance.

What are Conditions A, B and C for salaried members?

Condition A is met if substantially all of a member's expected pay is fixed, or varies but not by reference to the LLP's overall profits or losses. Condition B is met if the member does not have significant influence over the affairs of the LLP. Condition C is met if the member's capital contribution to the LLP is less than 25% of the disguised salary they expect to receive for the tax year. A member is only treated as salaried if all three conditions are met at once.

Why do property development LLPs get caught by the salaried member rules?

Development joint ventures often bring in an operating member to run a site day to day for a fixed monthly draw, with little or no capital contributed and no real say over funding or exit decisions, which sit with the capital partner. That combination is exactly the pattern the three conditions target, so operating members in JV structures are a common false positive if the LLP agreement is not drafted with this in mind.

How can a property JV avoid a member being treated as salaried?

By breaking any one of the three conditions: making a genuine part of the member's return vary with the actual profit or loss of the development, giving the operating member real influence over material decisions, or requiring a capital contribution of at least 25% of their expected fixed pay for the year. Most JV agreements are restructured to fail Condition A by linking part of the return to a profit-share waterfall rather than a flat monthly fee.

This article is general information, not personal tax advice, and tax rules change. Your own position depends on facts we cannot see from here — please take advice before acting on anything above.

← All articles