Implications for UK-based investment funds of the Upper Tribunal’s decision for salaried members of Limited Liability Partnerships
Alison Conley · November 15th 2023 · read
The recent tribunal case of HMRC v BlueCrest Capital Management (UK) LLP has important implications for members of Limited Liability Partnerships and the relevant rules governing covering disguised remuneration contained in the UK Income Tax (Trading and Other Income) Act 2005 (‘OTTOIA 2005’). The rules set out at s863A-G ITTOIA 2005 tackle situations where individuals who would otherwise be considered employees are members of an LLP in order to avoid being taxed under the PAYE/NIC regime. Where the rules apply, the LLP member is deemed to be an employee and the LLP is liable for PAYE and NICs accordingly.
The salaried members rules broadly provide that a member of an LLP will be treated as an employee for tax purposes if they meet all the following conditions:
- Condition A – It is reasonable to expect that at least 80% of the member's income derives from a fixed salary or other remuneration not linked to the profits or losses of the LLP;
- Condition B – the member does not have significant influence over the affairs of the LLP; and
- Condition C – the member’s capital contribution to the LLP is less than 25% of the member’s ‘disguised salary’ for a relevant tax year.
If a salaried member of an LLP meets all the above conditions, they will be taxed on their salary under the PAYE regime. However, if a salaried member of an LLP does not meet all the above conditions, they will be taxed on their share of the LLP's profits under the self-assessment regime and consequently, responsible for calculating and paying their own income tax and NICs.
The question of whether a salaried member of an LLP has significant influence over the affairs of an LLP is not always clear and there is scope for ambiguity, especially where fund managers might be concerned. To determine the extent of influence, the following factors can be considered when determining whether a member has significant influence:
- The member's role in the LLP
- The member's involvement in decision-making
- The member's financial interest in the LLP
- The member's professional qualifications and experience
From the above, it will be clear that a member paid a fixed salary with no voting rights and no entitlement to a share of the LLP’s profits, will likely be treated as a salaried employee and taxed under the PAYE regime. Conversely, a member of an LLP on a fixed salary who is also entitled to a share of the LLP's profits, has voting rights and is involved in decision-making would be unlikely to be treated as an employee and would be taxed on their share of the LLP's profits under the self-assessment regime. However, not all cases are as clear cut.
Referring back to the case in point, BlueCrest initially appealed to the First Tier Tribunal against HMRC’s determination that, other than the original executive committee, the LLP members should be taxed as employees. BlueCrest’s appeal only concerned the application of Conditions A and B, as it was accepted that the terms of Condition C were met by the individual members. The FTT found that all the members of BlueCrest met the requirements of Condition A and that members who were not portfolio managers or who were portfolio managers but with a capital allocation of less than $100m, also met Condition B and were, therefore, salaried members. Both HMRC and BlueCrest appealed the decision of the FTT.
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HMRC v BlueCrest Capital Management (UK) LLP
The Upper Tribunal rejected all the grounds of appeal put forward by both parties and upheld the FTT's decision. It held that:
There should be a meaningful link between the 20% ‘non-fixed’ remuneration and the profits and losses of the LLP.
Significant influence need not be over the whole of the LLP. Financial, managerial or operational responsibility over certain areas of the LLP’s affairs may be sufficient to demonstrate significant influence.
The Upper Tribunal's decision provides helpful guidance in relation to Condition B and establishes that an individual’s role and activities will substantially determine their taxation status. The judgment on Condition A is less helpful being based on lack of evidence rather than providing statements of principle. The position of each individual member will, however, be fact specific and with care, it should be possible to incentivise and compensate LLP members in a manner that meets the objectives of all parties.
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