HMRC v BlueCrest Capital Management (UK) LLP – The Supreme Court decides

The decision is likely to lead to increased HMRC scrutiny of both profit-sharing arrangements under Condition A and “significant influence” positions under Condition B. It also reinforces the importance of the legal source of that influence, with the courts focusing on whether it derives from the mutual rights and duties of members and the LLP.

Given the potential exposure to PAYE and employer’s national insurance contributions (NICs) where salaried member status applies, the amounts at stake can be material.

The Supreme Court dismissed BlueCrest’s appeal in a long-running case concerning whether certain individual members of an LLP should be treated as salaried members.

The salaried member rules were introduced in 2014 to prevent individuals who are, in substance, employees from obtaining partnership tax treatment simply because they are members of an LLP.

An individual will be treated as an employee for tax purposes if Conditions A, B and C are all met:

• Condition A considers whether remuneration constitutes “disguised salary”
• Condition B considers whether the individual has “significant influence” over the affairs of the LLP
• Condition C considers whether the individual’s capital contribution is at least 25% of their disguised salary

The BlueCrest case focused on Conditions A and B. Condition C was not in dispute and was not considered by the Supreme Court.

The case has been closely followed across the asset management industry, particularly as the interpretation of “significant influence” has evolved through a series of tribunal and court decisions.

The judgment confirms that the relevant members were receiving disguised salary and underlines that, for Condition B, the key question is whether the relevant influence arises from the mutual rights and duties of members and the LLP, rather than from personal standing or de facto influence alone.

For firms relying on Condition B, the focus will increasingly be on whether the influence attributed to particular individuals is grounded in legally enforceable rights and obligations within the LLP’s constitutional framework.

The decision is likely to lead to increased HMRC scrutiny of the salaried member rules.

Where an individual falls within those rules, the LLP is generally required to operate PAYE and account for employer’s national insurance contributions on their remuneration. With employer’s NIC currently charged at 15%, the amounts at stake can be significant.

Asset managers with remuneration arrangements driven primarily by individual performance should consider whether those arrangements remain robust following the judgment.

This may be particularly relevant where profit allocations are linked to individual portfolio P&L or operate on an “eat what you kill” basis, even where the amount ultimately remains capped by reference to the overall profits of the LLP.

The judgment is likely to increase HMRC scrutiny of whether there is a genuine connection between member remuneration and the overall profits of the LLP, or whether arrangements are, in substance, rewarding individual performance.

Firms that rely on Condition B should revisit their analysis of “significant influence” in light of the judgment.

The Supreme Court’s decision reinforces that the relevant influence must arise from the mutual rights and duties of members and the LLP. The question is not simply whether an individual is influential in practice, but whether that influence is grounded in the LLP’s legal and constitutional arrangements.

This is likely to prompt renewed scrutiny of LLP agreements, governance arrangements and committee structures. Firms relying on Condition B will need to understand whether the influence attributed to particular individuals is properly reflected in those arrangements.
HMRC guidance has historically suggested that individuals holding senior FCA controlled functions, and subsequently Senior Manager Function (SMF) roles, may possess significant influence for salaried member purposes. The judgment confirms that the source of the influence matters. For Condition B purposes, significant influence must arise from the mutual rights and duties of members and the LLP.

A senior portfolio manager, chief risk officer or SMF holder may be highly influential within a business. Colleagues, investors and regulators may all regard them as key decision-makers. Following BlueCrest, however, the tax legislation is asking a more specific question: Does that influence arise from the mutual rights and duties of members and the LLP?

Whether HMRC updates its published guidance remains to be seen. At a minimum, firms should expect HMRC to apply existing guidance through the lens of BlueCrest.

Condition C was not in dispute in BlueCrest and the judgment does not alter the existing framework for assessing capital contributions. Nevertheless, the decision may lead some LLPs to revisit whether reliance on Condition C provides a more straightforward route.

The decision may also cause some firms to revisit the relative advantages of LLP and corporate structures.

The LLP model continues to offer several commercial advantages, including flexibility in allocating profits between members, relative ease of admitting and retiring partners, and succession planning without many of the complexities associated with share ownership. However, the BlueCrest decision may lead some firms to reassess those benefits against the increasing significance of the salaried member rules and the potential exposure to employer’s national insurance contributions.

Corporate structures may be viewed as more straightforward from a salaried member perspective and can be attractive where founders or management teams wish to retain profits within the business. Unlike an LLP, where members are generally taxed on their share of profits as they arise, shareholders will often only be subject to tax when value is extracted from the company. Against that, corporate structures can be more rigid from an ownership perspective, promotions into ownership are often more complex, and the overall tax outcomes require careful assessment.

This is likely to become a more active discussion when establishing new management entities or reviewing existing structures.

The Supreme Court has provided important clarity on the operation of Conditions A and B and their application to LLP structures.

For many firms, the next step will be to consider whether existing remuneration arrangements, governance structures and salaried member analysis remain robust following the judgment.

Please get in touch with your usual S&W contact or the contact listed if you would like to discuss any of the above.

Approval code: NTEH7072631