Publish Date

Nov 27, 2023

BlueCrest Case Update: Salaried Member Rules in LLPs — Upper Tier Tribunal Ruling

A&M Tax Advisor Update

In this update, we present the key takeaways of the Upper Tier Tribunal (UTT) in HMRC v BlueCrest Capital Management (UK) LLP [2023] and outline how A&M can assist you. The BlueCrest case is the first to examine the application of the salaried members rules in the context of an asset management Limited Liability Partnership (LLP). As a reminder, the salaried member rules set out three conditions:

  • Disguised salary (Condition A)
  • Significant influence (Condition B)
  • Capital contribution (Condition C)

An individual member of an LLP is treated as a salaried member only if all three conditions are met, with PAYE and NICs treatment applying.

UTT decision key findings

The UTT was asked to consider the application of Conditions A (disguised salary) and B (significant influence) to members of an LLP engaged in investment management activities and providing back-office services to other entities within the BlueCrest group. The UTT upheld the FTT’s conclusions:

  • Condition A was met for all members
  • Condition B was only met for certain categories of members

For an overview of the FTT’s decision, you can refer to our summary and key takeaways from the first court case on the salaried member rules.

What is Condition A (disguised salary) in LLP?

Condition A is met when there is a reasonable expectation (looking forward) that at least 80 percent of the total amount payable by the LLP for the member’s services to the LLP (in their capacity as a member of the LLP) will constitute a ‘disguised salary.’ An amount payable to a member qualifies as ‘disguised salary’ if it  meets any of the following criteria:

  1. it is fixed;
  2. it is variable without reference to the overall amount of LLP’s profits or losses (i.e. aligned to individual performance); or,
  3. it is not, in practice, affected by the overall profits or losses of the LLP.

The UTT agreed with the FTT’s decision that the bonuses paid to the LLP members should be treated as disguised salary. BlueCrest’s argument suggesting that discretionary allocations may need repayment if there were insufficient LLP profits was rejected. A link is required between the amount paid and the overall profits or losses of the LLP, and this link should be stronger than requiring discretionary allocations to be repaid if there were insufficient LLP profits. The importance of providing evidence to demonstrate sufficient linkage has been emphasised.

What is Condition B (significant influence) in LLP?

Condition B is met if the rights and duties of the members of the LLP do not give a member significant influence over the LLP’s affairs. The UTT emphasised that whether an LLP member has significant influence depends on specific facts and circumstances, and there is no standard approach. The UTT agreed with the FTT in rejecting HMRC’s argument that significant influence requires control over all of the LLP’s affairs. Instead, the UTT would expect members to have responsibility in individual areas such as:

  • financial performance
  • operational responsibility
  • managerial responsibility

Again, the importance of having evidence to demonstrate significant influence has been emphasised. The FTT determined that LLP members who managed portfolios, with $100m of capital allocations each, have significant influence over the LLP’s affairs. However, this should not be seen as a threshold that must be met for significant influence to be evidenced; other factors should also be considered.

The UTT did not further consider the application of the Targeted Anti-Avoidance Rule (TAAR) as these grounds of appeal were no longer pursued by the parties. Overall, the UTT’s decision in the BlueCrest case is a welcomed development for taxpayers and a less welcomed one for HMRC, particularly regarding Condition B (significant influence) where it was decided that HMRC’s interpretation of significant influence is too narrow. However, given that there is no standard approach for determining if the condition is met, it can be more challenging for taxpayers to be certain whether they fall within the right side of the line. This difficulty can also apply to Condition A (disguised salary), where assessment will be required to determine the link between the amount paid and the overall profits or losses of the LLP. Regardless, it is clear that appropriate evidence is required to support positions taken by taxpayers.

How A&M can help

It is crucial to establish effective policies, procedures, and processes to manage and evidence compliance with the salaried member rules. Issues with the rules may arise throughout the year rather than at a specific  point, so this should be an iterative process. For instance, if a member joins or leaves an LLP, a retest should be undertaken. We have previously outlined common issues faced by LLPs in the article Salaried member rules — HMRC communications to LLPs and have experienced a rise in communications from HMRC to LLPs regarding salaried member rules compliance.

We have addressed numerous challenges faced by clients, assisting them in establishing effective systems and dealing with HMRC’s communications, including notifications, regulation 80 determinations and s. 8 decisions.

If you need any further help or information, or would like to discuss any of the above, please feel free to reach out to your usual A&M point of contact, Rhys Owen or Shirley Ly.