The Upper Tribunal (UT) has firmly upheld the decision of the First-tier Tribunal (FTT) in the salaried members rules case of HMRC V Bluecrest Capital Management (UK) LLP, rejecting HMRC's call for a narrow interpretation of the "significant influence" exclusion.
Under the salaried members rules, members of an LLP are treated as employees for tax purposes unless one of three exclusions apply. Bluecrest considered two of these exclusions, which, broadly, are:
- the individual has significant influence over the affairs of
the LLP; and
- it is reasonable to expect that at least 80% of the individual's total remuneration is "disguised salary" (basically, remuneration that is fixed or does not vary by reference to the overall profit or losses of the LLP).
Bluecrest was a UK LLP that provided investment management and certain back-office services. It had various individual members, some of whom were fund managers or traders (Portfolio Managers) and some of whom carried out other functions (Non-Portfolio Managers). Most Portfolio Managers were given capital to invest on behalf of clients, with more senior members being given larger amounts. For Portfolio Managers, the discretionary allocation was a percentage of the profit they made on their individual portfolio less costs, whereas for the Non-Portfolio Managers the methodology for determining the allocation was more nebulous and less formulaic.
In July 2022, the FTT held that the discretionary allocations were disguised salary for all the relevant members but that certain of the senior Portfolio Managers (those allocated at least $100m to invest and desk heads) had significant influence. The effect of this was that the salaried members rules did not apply to those senior Portfolio Managers, but did apply to the other Portfolio Managers and to the non-Portfolio Managers. For more details of the FTT decision, please see our briefing.
HMRC appealed the FTT's significant influence finding and Bluecrest cross-appealed the disguised salary finding.
2 Significant influence
The UT made clear that whether an individual has significant influence is fact specific to the particular LLP, so there is "no one size fits all approach". In doing so, the UT:
- rejected the view that issue should be determined by reference
to the difference between an employee and a partner in a
traditional partnership, or any other rigid test of that kind
(although the FTT was entitled to consider the role of a partner in
a traditional partnership in its analysis);
- agreed with the FTT in rejecting HMRC's view that
significant influence requires influence over all the affairs of
the LLP, considering that that would be a "highly unrealistic
approach" as, other than possibly for small partnerships, one
would expect members to have individual areas of
- agreed with the FTT that influence is not limited to management
of the partnership business, observing that the inquiry is fact
specific, and that financial performance and/or responsibility,
managerial responsibility and operational responsibility could each
give rise to significant influence. The UT acknowledged the
potential importance of financial "clout", but it is
worth noting that the courts did not rely on financial impact alone
when holding that Portfolio Managers with allocations of at least
$100m had significant influence; it was found that those members
were also very senior individuals with wider important roles;
- rejected HMRC's attempt to put a "gloss" on the expression "significant influence" by introducing a tripartite division of insignificant influence, normal influence and significant influence, albeit it agreed that "significant influence" must be more than just "influence".
The FTT had specifically considered whether the Non-Portfolio Managers had significant influence, and found that Bluecrest had not brought enough evidence to show that they had it. There had been a suggestion in FTT decision that operational teams might be less likely to have significant influence, whereas, although the significant influence position of the Non-Portfolio Managers was not appealed by Bluecrest, the tone of the UT is perhaps more open to this (in theory at least).
3 Disguised salary
The UT reject Bluecrest's argument that the fact that discretionary allocations might have to be repaid if there were insufficient LLP profits meant that they were sufficiently linked to the LLP's profitability to avoid being disguised salary. The court also followed the FTT in emphasising the importance of having evidence before it to demonstrate the sufficient linkage (and the taxpayer's failure in this regard).
The FTT had made clear that the threshold for the link to profits is a "low one" (albeit Bluecrest had failed to meet it), and taxpayers will be pleased that the UT appeared to agree with that position, observing that the threshold test "is set fairly widely".
It is unlikely that HMRC will be happy with the UT's decision, especially on significant influence, but, given the firmness of the judgment, it will be interesting to see if HMRC feel that a further appeal is worthwhile.
Taxpayers will be pleased that the UT has confirmed that HMRC's view of significant influence is too narrow. However, the conclusion of the court that the question is fact specific, may make it harder for some taxpayers to be certain that they are on the right side of the line. In practice, this may be more of an issue for those relying on significant influence as their primary argument against salaried member status (rather than their "back up" or secondary position)
In relation to disguised salary, as with significant influence, the UT did not provide a bright line test. Therefore, taxpayers will remain unsure exactly how strong the link needs to be between LLP profitability and member remuneration.
For those looking to rely on either the significant influence or non-disguised salary exclusions, the decision again shows the importance of having appropriate evidence for each member.
The FTT had found for HMRC in relation to the application of a targeted anti-avoidance rule contained in the salaried members rules. This aspect of its decision was not appealed by Bluecrest, and so we will have to wait for higher court consideration of the point.
The UT decision can be found here.
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.