KPMG’s Richard Green looks at the recent Supreme Court judgement and how LLPs may be taxed in the future.
The Court of Appeal has released its judgement in HMRC v BlueCrest Capital Management (UK), a landmark case on the application of the ‘Salaried Member’ tax rules. The judgement found in favour of HMRC, overturning the decisions of the First-tier Tribunal (FTT) and the Upper Tribunal (UT).
In short, this represents a victory for HMRC, albeit one won on surprising (and potentially for HMRC not entirely welcome) terms. The key point for LLPs is that the direction of travel has changed; whereas the FTT widened the net of what is meant by ‘significant influence’ for Condition B of the ‘Salaried Members’ rules, the Court of Appeal has narrowed it. Unless an appeal is launched that finds otherwise, the judgement will restrict the ability of partners to take the position that they exert ‘significant influence’ over the affairs of their LLP.
The history
The BlueCrest case began in 2022. BlueCrest claimed that some of its members should not be taxed as employees; HMRC sought to invoke the ‘Salaried Members’ legislation to claim that they should be. For the rules to apply, the members needed to meet all three of the following conditions:
Condition A: Disguised remuneration – broadly, 80% of the member’s profit share is ‘disguised salary’; that is remuneration that is fixed or variable without relation to the overall profits of the LLP, or not in practice affected by those profits;
Condition B: The member does not have significant influence over the affairs of the LLP;
Condition C: The member’s capital contribution to the LLP is less than 25% of their ‘disguised salary’.
BlueCrest claimed their members failed conditions A and B; HMRC opposed this.
Condition A: Despite a cross appeal of the FTT’s findings, the courts have been aligned on their judgment in relation to Condition A.
The members of BlueCrest were all deemed to meet the condition. What all three judgments make clear is that there must be a concrete link between the LLP’s profits and how the member’s profit share is calculated for the condition to be failed.
Condition B: The FTT found that some members of BlueCrest met condition B, whilst others failed it. The findings were contrary to HMRC’s stance that, to have significant influence, a member must be able to influence the affairs of the whole LLP. The tribunal ruled a member may have significant influence if they could only significantly influence particular (albeit important) aspects of the LLP’s affairs, such as its profits.
The Court of Appeal’s decision appears to be in direct opposition and whilst it results in a defeat for BlueCrest, is of particular interest because HMRC’s appeal was not upheld on the basis it had expected. It found that the FTT and UT erred on a point of law and have remitted the case to the FTT. At point are the very facts that made the judgement at the FTT of interest; the CoA judgement is firm in that only influence deriving from the legally enforceable rights and duties of the members is to be taken into account in assessing whether they have ‘significant influence’, not de facto influence arising from other arrangements. It should be noted that this reasoning was not part of HMRC’s original submission to the courts and may give unwanted results should the focus of the courts move from what happens in reality to merely the legal rights of a member.
Impact on LLPs
Taken alongside HMRC’s change to their guidance on Condition C (See our earlier article on this) the decision highlights the need for LLPs to have a firm understanding of the basis on which they consider members fail the conditions to be a salaried member.
Any members relying solely on their failure of Condition B should undertake a detailed review of their position and the evidence they hold to support their position. More commonly in professional service and asset management LLPs, Condition B was considered in support of another failed condition and these members should review their position to ensure their primary defence stands particularly when viewed alongside the change to HMRC guidance on Condition C. Understanding the statutory basis of your own position, its relation to the recent case law and how it might be affected in the longer term are the order of the day.
- Richard Green, Tax Director, professional services, KPMG UK
