When first published, the original proposal appeared to have relatively modest aims (see News brief "Taxation of partnerships consultation: LLPs and profit deferral in the firing line"). It was the less controversial of the two main changes to partnership tax; the mixed members proposals initially caused more concern because of their potential impact on bona fide arrangements (for example, arrangements to ensure that profits retained as working capital were taxed at corporate rates).

By contrast, the salaried members proposal sought to align the tax position of members of UK LLPs with members of other forms of partnership. Accordingly, HM Revenue & Customs (HMRC) proposed applying the "employed versus self-employed" case-law based status test to determine which members (if any) of a UK LLP should be taxed as employees. Most respondents to the original proposal broadly preferred HMRC's other method of achieving its objective; namely, a mechanical test that looked at the individual's exposure to economic risk, entitlement to a share of the profits or to a share of any surplus assets.

Questions raised in relation to that mechanical test were overtaken by events; that is, the issue of revised proposals on 10 December 2013 (the revised proposals) (www.gov.uk/government/consultations/a-review-of-two-aspects-of-the-tax-rules-on-partnerships). These transformed that test, setting the bar higher so that any individual member of a UK LLP who wished to retain self-employed tax status would have to demonstrate one of the following:

The revised proposals, including draft legislation, were accompanied by a technical note and guidance (the December guidance), which provided HMRC's views on how these new proposals would operate in practice (www.gov.uk/government/uploads/system/uploads/attachment_data/file/264589/partnerships.pdf).

This gave rise to immediate concerns, and the House of Lords Economic Affairs Committee has subsequently cast doubt on whether the revised proposals achieve the government's policy objective. It has concluded that there is too little time to settle all the outstanding issues, get the legislation right and enable businesses to adapt to the legislation in time for the 6 April 2014 start date. It also questioned why non-UK LLPs are not subject to the same rules.

Other issues raised by advisers include concerns about the period over which the "reasonable to suppose" test was to be applied, and the impact on rewards based on personal performance. A particular concern arose in relation to so-called "eat what you kill" models of profit allocation.

In response to continuing dialogue with businesses affected by the proposals, HMRC published a revised technical note and guidance on 21 February 2014 (the February guidance) (www.gov.uk/government/publications/salaried-members-rules-revised-technical-note-and-guidance). This was followed on 7 March 2014 by the publication of the revised Finance Bill 2014 clauses (www.gov.uk/government/collections/salaried-members-revised-draft-finance-bill-2014-legislation). The February guidance supplements, rather than replaces, the December guidance.

There are a few significant legislative changes; in particular, to condition A and condition C:

Although described as an "informal view" of how the revised proposals will apply to LLP members, the February guidance contains some 50 pages of further explanation and examples. This reflects the ongoing discussions between HMRC and interested parties since the December guidance was published. The February guidance does provide helpful clarification in a number of areas; in particular, confirmation:

The February guidance also contains a useful list of the matters that HMRC expects an individual to have influence over, in order to satisfy the "significant influence" test, and an acknowledgment that an individual who wields significant influence, without a formal role (for example, on committees) can satisfy condition B. It also explains the interaction with the Financial Conduct Authority's significant influence function test, confirming that those with FCA CF3 and CF8 status are likely to satisfy condition B.

Issues remain as to how the legislation will actually apply to various situations. Largely, this is a function of the vagueness of some concepts used in the relevant Finance Bill 2014 clauses, notably "significant influence" and the requirement to determine whether it is "reasonable to expect" at least 80% of the amount payable will be disguised salary.

While it is helpful that HMRC has now published significant amounts of guidance, concerns remain that this guidance is only an indication of how HMRC will apply the legislation. In some cases, this gives a more generous application than the legislation, particularly the TAAR, would seem to permit, and it is unsatisfactory that taxpayers should have to rely on HMRC interpretation to fall outside the legislation. This is a particular concern because real world situations rarely fall within the exact facts of any example given by HMRC, leaving taxpayers reliant on persuading HMRC, rather than the courts, of the merits of their case.