Upper Tribunal dismisses HMRC's appeal in respect of salaried members rules

In HMRC v Bluecrest Capital Management (UK) LLP [2023] UKUT 232 (TCC), the Upper Tribunal (UT) dismissed HMRC's appeal, finding that the First-tier Tribunal (FTT) had properly construed and applied the salaried members rules in sections 863 to 863G of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA).

Background

Bluecrest Capital Management (UK) LLP (BlueCrest) is part of the BlueCrest Group. The Group is involved in financial asset management. BlueCrest provides investment management services to the Group’s funds as a sub-investment manager working under a lead investment manager and providing back-office services to other Group entities.

Prior to 2016, the Group’s lead investment management entity received management and performance fees from the Group’s funds. The management fee was typically 2% of funds under management and the performance fee was 20% of profits for the relevant period. The lead investment management entity paid a proportion of the fees to its sub-investment managers, including BlueCrest. During this period there was a 'netting risk', namely, the performance fee was only paid on profits above a certain level, and any losses since the last performance fee payment were recovered before any performance fees were paid. Other investment managers’ losses were also netted against profits generally.

For the period 2016 to 2018, there was a change to the method of calculating the performance fee, with BlueCrest being paid 18% of the performance of each UK investment manager. From 2018, netting was reintroduced, and the performance fee increased to 20%.

HMRC determined that BlueCrest was liable to pay income tax (under the PAYE regime) and Class 1 NICs for the tax years 2014/15 to 2018/19, on the basis that all but four members of BlueCrest satisfied the salaried members rules in sections 863 to 863G ITTOIA (the Rules)  and should therefore be taxed as employees.

BlueCrest appealed to the FTT, which allowed its appeal in part, deciding that all members of BlueCrest met Condition A and some members met Condition B, of the Rules. The basis of the FTT’s decision was, in summary: (1) portfolio managers (including desk heads) met Condition A; (2) non-portfolio managers met Condition A; (3) portfolio managers with capital allocations of $100 million or more and the desk heads, did not meet Condition B; and (4) other portfolio managers and all non-portfolio managers met Condition B. It was common ground that Condition C of the Rules applied to the individual members of BlueCrest.

HMRC appealed to the UT, arguing that no members had significant influence over the affairs of BlueCrest such that Condition B was met by all members. In particular, HMRC contended that the mutual rights and duties of the members did not give the portfolio members or desk heads 'significant influence' over BlueCrest's affairs.

BlueCrest cross-appealed, arguing Condition A was not met by any members.

UT decision

Both the appeal and cross-appeal were dismissed.

HMRC's primary argument was that the FTT had made an error of construction in its application of the 'significant influence' test in Condition B of the Rules, because it had failed to consider adequately the distinction between a traditional partner and an employee, and because it had misconstrued the words 'affairs', 'influence' and 'significant'.

The UT rejected each of HMRC's arguments, noting variously that they were misconceived, sought to import words into the statutory provisions, and would set the bar for Condition B too high. The UT observed that the question of significant influence was acutely fact sensitive and there was no 'one size fits all' approach to the Condition B question.

On the meaning of Condition B generally, the UT observed that:

(i) mere membership of a partnership could not, of itself, constitute the significant influence referred to in Condition B, and that something more than mere membership was required;

(ii) the use of the word 'significant' had to be given effect, and something more than just influence was required; and

(iii) it was necessary to be wary of the argument advanced by BlueCrest, to the effect that one would normally expect the member of, for example, a City firm of solicitors, to fail Condition B.

HMRC also argued that the FTT had failed to properly apply the test in Condition B to the facts of the case and had reached conclusions that were not available to it on the evidence. Having regard to the high threshold for an Edwards v Bairstow [1956] AC 14 challenge, the UT rejected those arguments commenting  that they did not respect the terms of the FTT's decision, attempted to force the test of Condition B into an 'artificial straitjacket', when the question was instead a multi-factorial one requiring a careful analysis of all aspects of the workings of the relevant partnership, and sought to reargue the evidential case that was before the FTT. The UT also commented that HMRC had attempted to 'island hop' by relying on selected extracts from the cross-examination of witnesses before the FTT.

With regard to the cross-appeal, BlueCrest submitted that the FTT had erred in its construction of Condition A, setting the bar too high in terms of the link required between the remuneration paid to each member and the profits or losses for 'step 2'. In addition, BlueCrest argued that the FTT came to a decision on Condition A that was irrational and one that no reasonable tribunal could have come to on the evidence before it.

Although the UT agreed with BlueCrest that the threshold test in step 2 was wide, it concluded that BlueCrest had been unable to show the link required to take the discretionary allocations outside step 2, either as a matter of construction, or on the evidence. Further, the UT determined that, like HMRC, BlueCrest sought to re-argue the evidential case before the FTT by ignoring the totality of the evidence that was considered by the FTT and on which it had properly made its findings.

Finally, the UT observed that both the appeal and the cross-appeal proceeded on the implicit assumption that there was no difficulty in the UT delving into and overturning detailed findings of fact made by the FTT in a lengthy and carefully reasoned decision, following the hearing of a significant amount evidence over a number of days. However, the UT noted the reality was that it was always going to be a difficult task to persuade it, as an appeal tribunal, that the FTT had made an error in its findings of fact of the kind that would permit the UT to interfere with its findings.

Comment

This decision provides helpful guidance on the interpretation and application of the salaried members rules, confirming that whether or not the rules are satisfied is highly fact sensitive and requires detailed consideration of the specific facts of the relevant partnership.

It is also worth noting the UT's warning against 'island hopping' and its reiteration of the extremely high threshold that must be satisfied before it will interfere with findings of fact made by the FTT. In particular, the UT's intimation that it is unlikely to interfere with such findings in circumstances where the FTT has heard extensive factual evidence and delivered a lengthy and carefully reasoned decision, should be borne in mind when considering whether to challenge findings of fact made by the FTT on an Edwards v Bairstow basis.