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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%).