19 April 2024

Salaried Members Rules: Recent Changes And The Bluecrest Decision Revisited

Lubbock Fine


Lubbock Fine
We reported in our recent blog about HMRC's published changed of approach to Condition C of the salaried member rules.
UK Tax
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We reported in our recent blog about HMRC's published changed of approach to Condition C of the salaried member rules. As this change may make it more difficult for some LLP's to rely on failing Condition C, it's a useful time to review the case law developments in 2023 to Condition B – Significant Influence.

In the case of HMRC v Bluecrest Capital Management (UK) LLP, the Upper Tribunal (UT) partly ruled against HMRC's appeal on the application of the salaried member rules. This article explores some of the case's intricacies and delves into the implications it carries for LLPs in structuring and defining the roles of their members.

Recap on salaried member rules

The salaried member rules were introduced by HMRC to counteract the misclassification of LLP members as self-employed, preventing tax avoidance. These rules target members whose roles resemble employees rather than traditional partners in a partnership, subjecting them to PAYE income tax and National Insurance contributions.

To avoid being treated as a salaried member, an individual must FAIL to satisfy at least one of conditions A, B, and C: Each condition has a legislative definition but, in short, they are as follows:

  • Condition A: Disguised Salary – it's reasonable to expect that at least 80% of a member's profit share is "disguised salary" (essentially fixed and/or not varied in line with the LLP's overall profits).
  • Condition B: Significant Influence – the rights and duties of the member doesn't yield significant influence over the affairs of the LLP.
  • Condition C: Capital Contribution - The member's capital contribution is less than 25% of the expected disguised salary.

The tax case

Bluecrest is an investment management firm who have individual members, some of whom are fund managers or traders (portfolio managers), whereby their profit share was largely dependent on their individual portfolio performance. HMRC took the view that these members therefore met conditions A and B, as explained below.

Condition A: Disguised Salary

Bluecrest argued that there was an agreement with the members that if insufficient LLP profits were made some discretionary allocations would need to be repaid by members, therefore their profits were sufficiently linked to the LLP's overall profitability, therefore failing condition A.

The UT rejected this notion emphasising that, whilst this may have been the case, condition A requires more than a possibility of profits being varied. It needs to show evidence to demonstrate sufficient linkage to the LLP's overall profitability.

Although the UT did comment that the bar for linkage to LLP profits is a fairly low one, they considered Bluecrest failed to meet it in this instance.

Condition B: Significant Influence

HMRC's published guidance has always taken a very narrow interpretation of significant influence, suggesting that members must have influence over the entirety of the business. So, to take a simple example, in their view a head of department who only had influence over his department could not be said to have significant influence (over the whole business).

Turning to Bluecrest, HMRC argued that certain portfolio members didn't have significant influence, triggering Condition B. Condition B doesn't subscribe formulaic tests, so is naturally more subjective and must be case-specific.

The UT considered (unsurprisingly in the writer's view) that HMRC's interpretation was too narrow. They agreed that certain portfolio managers had significant influence, highlighting:

  • Significant influence should be based on "actual" influence, not necessarily formal agreements.
  • "Influence" is broadly defined, extending beyond management to encompass financial and operational aspects within an LLP.
  • Having significant influence over the entire LLP would be a "highly unrealistic approach", particularly for larger partnerships where it's common for members to have specific areas of responsibility, contributing to the overall affairs of the LLP.
  • Whilst financial "clout" was not the only factor, it was found that portfolio managers with at least $100m portfolios held significant influence, also taking into account their seniority and other responsibilities.
  • It was found that Bluecrest had not sufficiently evidenced that some of the other portfolio managers held significant influence and so it was decided that they meet condition B.

Key takeaways

Whilst this isn't a "slam dunk" case for the taxpayer, it may be encouraging for some firms to see the UT's decision that some of the salaried member conditions are, in the view of the Court, too narrowly defined by HMRC. Unless HMRC successfully appeal and get the decision overturned, the key takeaways from the case and the recent guidance change on condition C include:

  • Condition A – Disguised Salary – it's important that a member's profit is variable by reference to the LLP's overall profitability not, say, individual or team performance. Although there may be a "low bar", there needs to be clear evidence of the variability being applied, not just being a remote possibility.
  • Condition B – Significant Influence – whilst the UT's decision is case specific to Bluecrest, taxpayers can have some comfort that the test is not as narrow as HMRC believed. Firms relying on this condition as their primary defence should be wary, however, as HMRC are likely to require extensive evidence to substantiate the position in the event of an enquiry.
  • Condition C – Capital Contribution – for many firms, this was considered the easiest condition to fail as it was based purely on mathematics, however HMRC's change of view on what it sees as tax motivated increases of capital, as reported in our recent blog above, will be a challenge for some firms.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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