The Upper Tribunal (Tax and Chancery Chamber) has issued its judgment in an appeal relating to the application of the salaried members rules to members of BlueCrest Capital Management (UK) LLP. The Upper Tribunal has upheld the decision of the First-tier Tribunal, which had allowed the appeal in part and found that the remuneration paid to some of the limited liability partnership (LLP) members should not be taxed as employment income. This is the first case to consider the salaried members rules and will be of interest to other LLPs.
Background to the appeal
In BlueCrest Capital Management (UK) LLP v HMRC  UKUT 232 (TCC), the Upper Tribunal considered the interpretation of the salaried members rules for the first time. The rules were introduced to tackle disguised employment relationships by ensuring LLP members who provide services on terms more similar to employment are treated as employees rather than partners and taxed accordingly.
As explained in our previous article, the rules set out three conditions which, if satisfied, mean that the individual member must be taxed as an employee. If the member fails any of these conditions, they fall outside the scope of the salaried members rules. The Upper Tribunal only considered two of these conditions, A and B, as the parties had accepted that Condition C was satisfied:
- Condition A: it is reasonable to expect that at least 80% of the amount payable by the LLP to the individual member is disguised salary, ie it is fixed or it is variable but not by reference to the overall profits or losses of the LLP
- Condition B: the individual member does not have significant influence over the affairs of the LLP.
BlueCrest Capital Management (UK) LLP (“BlueCrest”), a member of the BlueCrest Group (“the Group”), appealed against HMRC assessments for almost £200m in income tax and National Insurance Contributions (NICs) in relation to 80-100 individual members, including portfolio managers (individuals responsible for managing investment portfolios) and non-portfolio managers (including other front-office members and individuals responsible for providing back-office services to the Group). The assessments were based on the fact that the members met Conditions A and B, which BlueCrest disputed.
The First-tier Tribunal (Tax Chamber) (“FTT”) allowed BlueCrest’s appeal in part. It held that both the portfolio managers and non-portfolio managers met Condition A, as their remuneration was not linked to or affected by the overall profitability of the LLP. The FTT also held that portfolio managers with capital allocations of $100m or more and desk heads did not meet Condition B as they had significant influence over the affairs of the LLP, but the other portfolio managers and non-portfolio managers did. As a result, the salaried members rules did not apply to the former, but they did apply to the latter.
HMRC appealed against the FTT’s decision on Condition B, and BlueCrest cross-appealed on Condition A. After a hearing in June 2023, the Upper Tribunal issued its decision on 18 September 2023, upholding the FTT decision and dismissing both the appeal and the cross-appeal.
Condition A: remuneration linked to LLP profitability
BlueCrest disputed the FTT’s findings in terms of the link required between the remuneration paid to the individual members and the profits and losses of the LLP. BlueCrest argued that the wording of Condition A was wide enough to include a situation where remuneration is linked to an LLP’s profits and losses simply by virtue of being limited by the amount of such profits and losses in a particular year.
The Upper Tribunal rejected that argument. It agreed with the FTT that while the statute is broadly drafted, it requires “something more than the possibility of there being insufficient profits to pay discretionary allocations”. From the point of view of a traditional partnership, this means that each individual partner must receive a share of the profits and shoulder a share of the losses of the LLP. In BlueCrest’s case, the discretionary allocations were not variable by reference to, or in practice affected by, the LLP’s overall profitability. As a result, all of BlueCrest’s members met Condition A.
Condition B: significant influence
HMRC argued that portfolio members with capital allocations of $100m or more and desk heads fell within the scope of the salaried members rules because the mutual rights and duties of the members did not give them significant influence over the affairs of the LLP.
In rejecting each of HMRC’s grounds of appeal, the Upper Tribunal made the following findings:
- The question of significant influence must be considered not just by reference to the agreements setting out the rights and duties of the LLP members but also in terms of actual influence, which may not necessarily derive from any formal agreements.
- The statute does not set out any particular test for establishing whether the LLP members had significant influence. In deciding that question, the FTT was entitled to consider what the members did within the partnership, including by reference to the role of a traditional partner to “find, mind and grind”.
- The reference to significant influence over the affairs of the partnership in Condition B is not to the entirety of the affairs of the partnership but can be to any aspect of those affairs.
- The word “influence” has a broad meaning. It is not restricted to influence over the management of the partnership and can include influence over financial performance or operational activities.
- There is no “one size fits all” approach to determining whether there is significant influence, as it will depend on the facts of the particular case.
The Upper Tribunal’s judgment preserves the status quo following the FTT decision. The Upper Tribunal has refused to read overly restrictive tests into the legislation on the basis that the statute has been broadly drafted. In light of this, a relatively broad range of LLP members with different levels of involvement in various aspects of the partnership will fall outside Condition B of the salaried members rules. This is potentially helpful to LLPs and especially hedge funds, which may have a similar set up to BlueCrest.
The decision reinforces the fact that each case will turn on its facts. The Upper Tribunal stated that the application of Condition B is an “acutely fact sensitive exercise”, and the same can be said of the other conditions. It is, therefore, possible that HMRC will seek to take a more restrictive approach to a different fact pattern.
It remains to be seen whether this case will be appealed to the higher courts. However, the Upper Tribunal did note that the appeal and, to some extent, the cross-appeal were brought on grounds that sought to reargue the evidential case before the FTT. The Upper Tribunal noted that the parties had assumed there would be no difficulty in overturning the FTT’s detailed findings of fact when this could not have been further from the truth: “it was always going to be a difficult task to persuade this tribunal, as an appeal tribunal, that the Judge had made an error in his findings of fact of the kind which would permit this tribunal to interfere with those findings.” Given these comments, the case may go no further.
Is this the last we will hear on the salaried members rules? It seems unlikely. HMRC is paying close attention to compliance with the rules, especially given the large amounts of tax at stake, and it is unlikely to be deterred by the Upper Tribunal decision. Taxpayers should carefully consider their position in approaching settlement discussions with HMRC, as well as in making any changes to their operations with the aim of falling outside the salaried members rules. HMRC may well seek to take another case with more favourable facts in the future or perhaps look to tighten the legislative drafting.
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