The amount of tax at stake in this matter is circa £200 million and so it is no surprise that it has found its way to the Supreme Court. The case concerned the salaried members legislation and whilst it is not quite over, HMRC have the upper hand.
The salaried members legislation was introduced to counter the perceived unfairness in the taxation of certain members of limited liability partnerships (LLPs). It contains three separate conditions each aimed at capturing a different feature of “disguised employment” in an LLP. A member is to be treated as an employee for tax purposes if each of the three conditions is met; if any one of the conditions is not met, the member is not to be treated as an employee.
Condition A concerns the nature of the member’s receipts and is met if at least 80% of a member’s remuneration from the LLP is: (a) fixed; or (b) is variable but is varied without reference to the profits or losses of the partnership; or (c) is not in practice affected by the overall amount of those profits or losses. Condition B concerns a member’s influence and is met if a member does not have significant influence over the affairs of the LLP. Condition C concerns the capital contribution to the LLP (which was not in issue in this case as it was accepted that the relevant members had not each made a sufficient contribution to fail this condition).
BlueCrest Capital Management (UK) LLP (BlueCrest) is a UK registered LLP which carries on the business of providing investment management services. For the five tax years - 2014 to 2019 inclusive, HMRC took the view that all but four individual members of BlueCrest met the conditions for the salaried members legislation to apply. The four exceptions were members of BlueCrest’s original executive committee who HMRC accepted had significant influence over the affairs of BlueCrest and therefore did not meet Condition B. HMRC made PAYE determinations in respect of all the other members, which totalled approximately £142m. It also argued that BlueCrest was liable to pay Class 1 NICs of approximately £55.3m for the same tax years.
In 2014, BlueCrest had 82 individual members, the majority of whom were investment managers responsible for managing an investment portfolio as part of the investment management services provided by BlueCrest to other group entities. The other members were responsible for a mixture of administrative and back-office services to the BlueCrest group, such as technology, facilities, legal and compliance and research.
As regards Condition B, the Supreme Court said that where there is a written agreement governing the operation of an LLP, that agreement will be the starting point for identifying the rights and duties of the LLP and the members: it is the ultimate source. However, the source of qualifying influence is not limited to that agreement and qualifying influence might also derive from the mutually enforceable rights and duties of a member of the LLP pursuant to some delegated authority or by virtue of their appointment to a specific role in the LLP, where, in each case, the relevant right or duty may not be found expressly on the face of the LLP agreement itself but can ultimately be traced back to that agreement. The fact that a document (namely the written LLP agreement if there is one) might have an “entire agreement” clause cannot exclude all other sources or be conclusive as to the source of the relevant rights and duties in this context. However, influence from other sources, including de facto influence and influence arising from personal qualities, performance or client relationships, will not satisfy Condition B.
The Supreme Court said that the words "influence" and "significant influence" in Condition B, should take their ordinary meaning. "Influence" did not require a member to have the ability or power to control the relevant LLP’s affairs or determine a particular course of action. It was sufficient for the member to have the ability to influence the affairs of the LLP in the sense of having the right to participate in important decisions capable of affecting the affairs of the LLP or the way the affairs of the LLP are conducted, whether through meaningful voting or other rights. That the influence must be significant must add some intensity to the strength of the influence and must have "practical and commercial substance in the conduct of those affairs in the real world". This means that participation in decision-making at board or strategic and/or management level is likely to qualify, whereas day to day decision making on a purely operational level may well not qualify.
The Supreme Court rejected BlueCrest’s argument that significant influence, derived from, or by virtue of, a delegated role on operational or day to day decisions in a particular part of the business, was sufficient to satisfy Condition B. Instead, what is required is that the relevant member can influence important decisions concerning BlueCrest and its business viewed as a whole.
The individual members in BlueCrest had significant responsibility, including for high value investment decisions, but their role in BlueCrest's governance was minimal. BlueCrest was run by its board and executive committee. Members had a right to be consulted on "strategic matters affecting the development of the business" and were entitled to vote on certain exceptional transactions but, given the voting structure of BlueCrest, the matters reserved for members’ votes would have been insufficient to give those members significant influence over the affairs of BlueCrest.
Despite the Supreme Court's ruling in respect of this condition, the issue as to the application of Condition B had already been remitted back to the First-tier Tribunal (FTT) by the Court of Appeal, which the Supreme Court has not interfered with. The position in respect of this condition is not therefore over just yet.
As regards Condition A, the discretionary allocations made to individual members were calculated by reference to the profits made by the individual portfolio manager or, in the cases of desk heads, their desks. In the case of the portfolio managers, the calculation was based on the net profit or loss on their portfolios, to which (if there was a profit) a headline percentage was applied to produce a gross award from which costs were then deducted to produce a net award. The discretionary allocation was equal to the net award. The FTT in this case found as a fact that BlueCrest’s policy was that if it transpired that its total profits for a year were less than the total discretionary allocations for that year, the latter would be reduced accordingly. If that situation arose, the total profits would therefore act as a cap on the discretionary allocations and BlueCrest claimed that the existence of this policy meant that it could not be said that the discretionary allocations were “varied without reference to the overall amount of the profits or losses of the limited liability partnership” and therefore, the portfolio managers and desk heads failed Condition A and were not to be treated as employees of BlueCrest for income tax purposes. The Supreme Court rejected this argument on the basis that the portfolio managers and desk heads were remunerated by reference not to the profits of BlueCrest as a whole but to the profits generated by themselves or by their team. For this reason, the individual members did not fail Condition A.
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