Tribunal considers salaried member rules for the first-time and allows taxpayer's appeal in part

In Bluecrest Capital Management (UK) LLP v HMRC [2022] UKFTT 204, the First-tier Tribunal (FTT) considered, for the first time, the salaried member rules in section 863A-G, Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) and in allowing the taxpayer's appeal in part, concluded that Condition A (disguised salary) was met in relation to all members, but that Condition B (significant influence) was only met for certain categories of members.

Background

This appeal concerned the application of the salaried member legislation which can be found at section 863A-G, ITTOIA (otherwise known as the salaried member rules). The salaried members rules were introduced in 2014 to counter situations where UK limited liability partnerships (LLPs) avoided employment taxes by making junior workers members (rather than employees) without bearing the risks, rewards and responsibilities typically associated with partnership. Under the rules, members of an LLP are treated as employees for the purposes of income tax and national insurance contributions (NICs), where each of the following tests is passed:

Condition A: At least 80% of their reward for the performance of their services as a member of the LLP is 'disguised salary', fixed or variable, without regard to the overall profits/losses of the partnership.

Condition B: The mutual rights and duties of the members of the LLP and of the partnership and its members do not give them significant influence over the affairs of the partnership.

Condition C: They have no significant money investment in the LLP i.e. their contribution is less than 25% of their disguised salary.

If a member fails one or more of the above tests the member will be respected as being self-employed and will not be treated as an employee.

Bluecrest Capital Management (UK) LLP (BCM) is part of the BlueCrest Group and is a hedge fund manager providing support services to the group with its own investment management business.

BCM does not have any direct employees and employs its more junior investment managers and many of the back-office staff (around 200 staff in total) through a service company.

BCM's members are divided into the following three categories:

Infrastructure members - support/back office, including department heads.

Discretionary traders/portfolio managers - including desk heads, with many having a capital allocation in the LLP of over $100 million. 

Other front office members - researchers/technologists.  

The members received three categories of remuneration in the tax years in dispute:

(i)   Priority distributions (PDs), resulting in individual members receiving a fixed amount each month i.e. a fixed salary.

(ii)   Discretionary allocations (DAs), which were determined at the discretion of the board i.e. bonuses.

(iii) Income points allocations (IPAs). These were any remaining profits after discretionary allocations, made by reference to the 'income points' held by each member. They were insignificant for the individual members, being weighted in favour of the corporate members. 

HMRC issued determinations to BCM for the period 2014-2019, totalling just under £200,000,000, in relation to alleged PAYE and NICs liabilities on the basis that the salaried members rules applied.  

BCM appealed the decisions to the FTT on the basis that Conditions A and B had not been met. If either condition was not met, BCM's appeal would succeed. 

FTT decision

The appeal was allowed in part.

The FTT was of the view that the DAs satisfied Condition A, but as certain portfolio manager members, including desk heads, had significant influence over BCM's affairs, Condition B was not satisfied. It was agreed between the parties that Condition C applied to all members.

Comment 

This is the first case to consider the salaried members rules and is an important decision on the taxation of LLPs. Taxpayers and their advisers will be interested in the FTT's careful analysis of the salaried members rules and in particular Conditions A and B. 

Given the lack of authority on this issue and the sums involved, it will be interesting to see if BCM seeks permission to appeal to the Upper Tribunal. 

The decision can be viewed here.