Upper Tribunal rejects HMRC's appeal against salaried members’ rules decision

Thursday, 21 September 2023
The Upper Tax Tribunal has rejected HMRC's appeal for a narrow interpretation of the 'significant influence' exclusion in the limited liability partnership (LLP) salaried members' rules, in the case of HM Revenue & Customs v BlueCrest (2023 UKUT 00232 TCC).

The salaried members' rules in s.863a–s863g of the Income Tax (Trading and Other Income) Act 2005 are designed to remove the presumption of self-employment for LLP members who had disguised their employment status by being a member. They state that members of an LLP are generally treated as employees for tax purposes unless one of three exclusions apply. In the BlueCrest case, the relevant tests were that the individual has significant influence over the affairs of the LLP; and whether at least 80 per cent of the individual's total remuneration was 'disguised salary' that did not depend on the LLP's total profits.

HMRC considered that the salaried members' rules applied to the discretionary payments that were typically allocated to the BlueCrest LLP members according to the percentage of the profit they made on their individual portfolios. It duly raised GBP200 million of determinations across five tax years for income tax and national insurance contributions (NICs) on the basis that the exceptions did not apply.

BlueCrest successfully appealed these determinations in the First-tier Tax Tribunal (FTT). The FTT held that the discretionary allocations were disguised salary for all the relevant members, except that some of BlueCrest's senior portfolio managers qualified as having significant influence and were not subject to the salaried members' rules.

HMRC appealed the FTT's decision and the Upper Tax Tribunal has just pronounced its judgment. It found that whether an individual has significant influence is fact-specific to the particular LLP, and rejected the view that issue should be determined by reference to the difference between an employee and a partner in a traditional partnership or some other rigid test. It also rejected HMRC's argument that 'significant influence' requires influence over all the affairs of the LLP, and agreed with the FTT that influence is not limited to management of the partnership business. It also rejected HMRC's attempt to interpret 'significant influence' by distinguishing between 'insignificant', 'normal' and 'significant' influence.

'Taxpayers will be pleased that the UT has confirmed that HMRC's view of significant influence is too narrow', commented law firm Travers Smith. 'However, the conclusion of the court that the question is fact specific, may make it harder for some taxpayers to be certain that they are on the right side of the line.' HMRC is unlikely to be happy with the tribunal's decision, especially on significant influence, said the firm. But, it added, the judgment was 'firm' and HMRC may not feel able to appeal further.

'While there will be no requirement for a judge in a future case to adopt the same approach that the FTT did in BlueCrest...they should not apply the test in the restrictive way HMRC were seeking in BlueCrest and have been asserting in practice', commented Damien Crossley of law firm Macfarlanes.


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