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UK Salaried Members: The Upper Tribunal Weighs In

02 October 2023
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In the latest round between HMRC and BlueCrest Capital Management (UK) LLP (“BCM(UK)”), both sides were unsuccessful in their appeals. By way of background, the First Tier Tribunal had previously held that:

  • all individual members of BCM (UK), including portfolio manager members, did not fall outside the Salaried Member rules, on the basis of Condition A, as their shares of profits did not meet the 80:20 test. BlueCrest challenged this conclusion and lost in the Upper Tribunal;
  • certain portfolio managers (of BCM(UK)) did fall outside of the Salaried Member rules on the basis of Condition B. The First Tier Tribunal held that they did have significant influence. HMRC challenged this conclusion, and lost in the Upper Tribunal.

As things stand, the outcome is that BCM(UK) owes HMRC income tax and National Insurance Contributions in respect of the UK LLP profit allocations to those held to be Salaried Members. A few initial points to note are:

  1. The amounts (currently) owed to HMRC are less than they contended. HMRC had initially contended that all but four (4) members of BCM(UK) were (between 2014/15 and 2018/19) Salaried Members;
  2. BCM(UK) will (if the case does become final) presumably seek to utilise the PAYE regulations (introduced following the Demibourne case) so as to direct the income tax assessments to individuals, and so credit tax already paid by the partners against the amounts sought by HMRC; and
  3. It was noted at the First Tier Tribunal that “BlueCrest has also issued judicial review proceedings regarding the legality of the respondents…application of the salaried members rules in the High Court. Those proceedings are stayed pending this appeal.”

In the event that HMRC refuses to issues a direction (required under 2., above) or BlueCrest resurrects the judicial review proceedings (under 3.) then the litigation may not be over yet, even if the status decision becomes final.


Wider impact

With both sides unsuccessful on appeal, it remains to be seen whether the matter will (if granted permission) be appealed further.

As things stand though, key takeaways for alternative asset managers (structured as UK limited liability partnerships) are:

Condition A can capture an individual as a Salaried Member if their reasonably expected remuneration, from the UK LLP, is (i) fixed or (ii) is variable, but is varied without reference to the profits or losses of the partnership or (iii) is not in practice affected by the overall amount of those profits or losses. The BCM(UK) case, as it stands, makes clear that:

  • the question of what it is “reasonable to expect” always looms large in the analysis. HMRC has previously stated, in their relevant guidance, that purely discretionary allocations (e.g., without reference to any contract or calculation methodology) may not meet the reasonable to expect threshold when applying the 80:20 test. Of course the reasonable expectation conundrum cannot be solved by guaranteeing an amount, otherwise it will be fixed and so disguised salary;
  • any reasonably expected amounts will need to be affected by the profits. In this regard, it will not be sufficient for the profits of the partnership only to be relevant as a last step. For example, it is not (so the BCM(UK) case says) sufficient for the only reference to profits to be whether sufficient amounts exist to pay the already determined allocation.

We have experience of successfully arguing Condition A with HMRC previously e.g., where UK LLP members’ profits were notionally allocated in accordance with points awarded on joining (including stated in their respective Deed of Adherence). In one such example, the subsequent profit allocation did not match the points exactly each year, but the allocations were close enough to satisfy HMRC of both the reasonable expectation and the real variance with profits of the firm. Such an approach could be of interest to, for example, operational professionals if unable to rely upon Condition B.

Condition B is met if a member does not have significant influence over the LLP’s affairs. As the case stands, the Upper Tribunal found that:

  • “There is no one size fits all approach to answering the Condition B question” and that “Whether there is significant influence in the case of any individual member of a partnership depends upon the facts of the particular case.”. On the one hand, this is good news for alternative asset managers, structured as a UK LLP. It should prevent HMRC from making sweeping classifications of “types” of members e.g., successfully arguing that only those on management or executive committees have significant influence. It does also reinforce the point though that where managers will seek to rely upon significant influence:
    • they have the rationale as to why written down before HMRC knocks at the door/arranges (for example) a routine Employer Compliance Visit;
    • it can be demonstrated how the business operates in practice, in accordance with the significant influence that the manager is seeking to assert.
  • the First Tier Tribunal was correct in refuting HMRC’s view that significant influence requires influence over all the affairs of the LLP, considering that approach to be “highly unrealistic…”. It is a little odd that HMRC argued for influence over all affairs in this case, as Example 34 of their original guidance, which was particularly relevant given the years under dispute, said that:

“In cases where the firm’s activities consist wholly or almost wholly of regulated activities and the individual in question significantly contributes to the firm’s major decisions (management, strategic or [emphasis added] investment-related), then it is likely that HMRC would accept that this constitutes significant influence for the purposes of Condition B”.

Notwithstanding the above, the $100m capital threshold applied to BCM(UK) (in holding certain portfolio manager members to have significant influence) was specific to its facts (and, in particular, AUM). If the decision does become final then it may be difficult for HMRC to successfully argue that (for example) three (3) portfolio manager members equally managing a fund of any size do not have significant influence.

  • it rejected HMRC’s contention that the issue should be determined by reference to the difference between an employee and a partner in a traditional partnership. The determination is by reference to statute.


What now?

While the case may indeed move on to appeal, we suggest that all alternative asset managers consider:

  • their position vis-à-vis the Salaried Member tests, including whether this is currently adequately documented, and
  • whether a UK LLP structure remains optimal for this business, bearing in mind also regulatory capital requirements.

If you have any questions regarding this matter, please do not hesitate to get in touch with your usual Centralis contact or:

Jon Hanifan,, Business Development Director.