6th October 2023
Salaried Members (SM) legislation: The Upper-tier Tribunal (Tax and Chancery) (UTT) judgement on appeals by His Majesty’s Revenue and Customs (HMRC) and BlueCrest Capital Management (UK) LLP (BlueCrest) heard on 27-29 June 2023, was released on 18 September 2023. The judges confirmed that the First-tier Tribunal (FTT)’s decisions were correct and dismissed both appeals. However, the judges did provide some clarification on HMRC’s interpretation of the ‘significant influence’ exclusion which was considered too narrow. It remains to be seen if either HMRC or BlueCrest take their appeals further.
The original FTT decision was published on 29 June 2022. In our previous article, we explained that the SM rules set out three conditions that, if all met, meant the member is treated as an employee of the partnership for Income Tax and National Insurance (NI) purposes. In the appeal to the FTT, the parties accepted that condition C was met – where the individual’s capital contribution is less than 25% of the amount of the disguised salary that it’s reasonable to expect the member to receive.
So only conditions A and B were considered by the UTT. To recap, the conditions are:
- Condition A: If at the relevant time it is reasonable to expect that at least 80% of the total amount payable by the LLP, for the individual’s services in individual’s capacity as a member of the LLP, will be ‘disguised salary’. This includes payments which are either fixed, variable but without reference to the overall profit or loss or is not in practice affected by the overall amount of profits or losses of the LLP.
- Condition B: The mutual rights and duties of the individual do not have significant influence over the affairs of the LLP.
In its decision, the FTT partially allowed BlueCrest’s, stating that all members of BlueCrest met condition A and some met condition B. However, BlueCrest cross-appealed against the decision, arguing that the FTT erred in its construction of condition A and applied the wrong test, resulting in the appeal.
HMRC’s appeal against the FTT’s decision was based on the argument that no members had significant influence over BlueCrest’s affairs, and that the FTT erred in its construction of Section 863C Income Tax (Trading and Other Income) Act 2005 and its application of the test.
Summary of the UTT decision
The UTT found that:
- All members of BlueCrest met condition A due to the insufficient link between profits and discretionary allocations.
- Portfolio managers and desk heads with capital allocations of $100 million or more do not meet condition B due to their significant influence over BlueCrest’s affairs, including managerial and financial activities.
- Other portfolio and non-portfolio managers, other than the original executive committee, meet Condition B as they do not have significant influence over BlueCrest’s affairs.
What does the decision mean for LLPs?
Although the UTT decision merely reinforced the earlier FTT decision, the case again emphasises the importance of making sure that bonuses and performance shares vary with the LLP’s profits when people fail condition A.
Perhaps more significant, in the judges’ view, is that interpretation of condition B may cover more members than HMRC has previously suggested. The judges found that significant influence can encompass managerial, financial, and operational aspects of a firm.
Furthermore, this influence does not have to cover all aspects of the LLP, but the member must demonstrate significant influence over a key part of the firm that contributes significantly to the firm’s business. This could be helpful for LLPs and other professional firms if they have a similar setup to BlueCrest.
All LLPs should review their LLP structure in light of this judgement. This involves:
- Having a robust process in place to demonstrate that they failed one of the conditions and revalidating their conclusion at each re-test date.
- Reassessing compliance regularly using trigger points such as year-end, recruitment, promotion, retirement, new teams, and business lines, etc.
The UTT decision may not deter further cases or legislative drafting, as HMRC is expected to closely monitor the SM legislation and its compliance, due to potential Income Tax and NI leakage.
How we can help
As we represent a number of LLPs, our team has in-depth experience and knowledge of the SM legislation. We can help you assess member activities to determine if you are compliant with the legislation and mitigate any risks identified. For more information or to discuss the above, please contact your normal haysmacintyre contact or the Employment Tax team.