Upper Tribunal Affirms FTT Bluecrest Decision on LLP Salaried Member Rules

Asset managers established as LLPs will welcome the Upper Tribunal’s recent decision to uphold the decision of the First Tier Tax Tribunal (“FTT”) on the application of the salaried member rules in Bluecrest.¹ Our previous OnPoint on the FTT’s decision can be found here.

The salaried member rules were introduced in 2014 to tax LLP members as employees (subject to PAYE and employer NICs) unless they “fail” one of three conditions, each aimed at capturing a different feature of “disguised employment” in an LLP. These are, in brief:

• Whether the individual receives a disguised salary (including variability of payments to members otherwise than by reference to the LLP’s overall profits or losses).
• Whether the individual has significant influence over the affairs of the partnership.
• Whether the individual has made a sufficient contribution to the capital of the LLP.

The FTT decided that portfolio manager members of Bluecrest did exercise significant influence and so were not salaried members. The appeal primarily focused on the significant influence test (Condition B), which HMRC argued the FTT had erred in construing on a number of grounds. Bluecrest cross-appealed, including on the construction of the disguised salary condition (Condition A) in respect of which the FTT decided that members’ profit allocations did not vary by reference to the profits of the LLP as a whole.

The Upper Tribunal dismissed all grounds of HMRC’s appeal. Agreeing with the FTT, it held that significant influence:

• Is acutely fact-specific and there can be no substitute for applying the words of the statute to the individual case. It requires a multi-factorial analysis of all aspects of the workings of the relevant partnership. The Upper Tribunal dismissed various grounds of appeal by HMRC, which attempted to restrict and paint a gloss over the statutory test. Although the judgment does not provide much precedent value on how to apply the test, the resistance to its narrowing is welcome for LLP businesses. The only question to be asked is by reference to the wording of Condition B, and that is “whether the mutual rights and duties of the members of the LLP, and of the partnership and its members, do not give the members significant influence over the affairs of the partnership”. HMRC has also accepted that it is permissible to consider this question in terms of actual (de facto) influence, which may not necessarily derive from the LLP agreement or any formal agreement governing the rights and duties of the members.
• Need not be over the whole business of an LLP (which was HMRC’s position in guidance) and need not be confined to managerial influence – it can be over any aspect of the affairs of the partnership. A member may have significant influence over, for example, the financial or operational aspects of the business. The Upper Tribunal considered HMRC’s approach to be highly unrealistic, and that  one would expect the members of a partnership to have individual areas of responsibility.
• Must be adequately evidenced for each member with significant influence. An appropriate volume of contemporaneous board minutes recording active decision making by relevant individuals will assist in demonstrating actual significant influence as a factual matter – constitutional arrangements, general descriptions of departmental responsibilities or job titles are, in themselves, likely to be insufficient.

Similarly, the Upper Tribunal dismissed Bluecrest’s cross-appeal regarding Condition A. As stated in the FTT decision, Bluecrest had failed to provide evidence that discretionary allocations were capable of variation by reference to the profits of the LLP despite the potential for allocations to be scaled back in the event of insufficient overall profits. The Upper Tribunal was therefore not prepared to challenge the FTT’s findings of fact.

In reaffirming the FTT’s broad interpretation of significant influence, the Upper Tribunal’s judgment is very positive for taxpayers. While less positive, its decision to reject Bluecrest’s cross-appeal on Condition A is unsurprising. It remains to be seen if HMRC will appeal the decision on significant influence or seek to limit the judgment to the specific facts of the case. In any case, the latest developments should be welcomed by asset managers established as LLPs. 

Footnotes

1) [2023] UKUT 00232 (TCC)