In HMRC v BlueCrest Capital Management (UK) LLP [2023] UKUT 00232 (TCC) (“HMRC v BlueCrest”), the Upper Tribunal (“UT”) has upheld the decision of the First-tier Tribunal (“FTT”) regarding the United Kingdom (“UK”) salaried member rules under ss 863A – 863G Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”).  HMRC v BlueCrest is notable as the first case to consider the UK’s salaried member rules and the construction of the legislative term “significant influence” in the UK’s tax code.

HMRC v BlueCrest before the FTT

As a short recap, the decision of the FTT in HMRC v BlueCrest concerned a UK registered limited liability partnership (“BlueCrest LLP”), which carries on business in the alternative investment industry as part of the provision of investment management services to the funds managed by the BlueCrest group.  The question before the FTT was whether the members of BlueCrest LLP (of which there are two main categories; portfolio and non-portfolio) should be treated as employees for UK income tax and national insurance contributions purposes.

The First-tier Tribunal considered whether two out of the three conditions (Conditions A, B and C) of the salaried member rules were satisfied for each category of members.  If two conditions were satisfied, the relevant members would be treated as employees for UK tax purposes.

Condition A would be satisfied if it is reasonable to expect that at least 80% of the total amount payable by BlueCrest LLP in respect of an individual members’ performance during the relevant period was disguised salary.  The term “disguised salary” includes fixed amounts, amounts which are variable (but without reference to the profits and losses of an LLP) and amounts which are not practically affected by the LLP’s financial performance. 

Condition B would be met if the mutual rights and duties of the members of BlueCrest LLP did not give the relevant member “significant influence” over the affairs of the LLP.  (For completeness, Condition C was not in issue in the litigation.)

The FTT allowed the appeal by BlueCrest LLP in part only: portfolio and non-portfolio managers met Condition A, but portfolio managers with capital allocations of $100 million or more, and desk heads, did not meet Condition B.  Further commentary on the FTT judgement can be found in the 18 August 2022 edition of Brass Tax in the article “BlueCrest Salaried Members Case: Who is a Significant Influencer?”

HMRC v BlueCrest before the UT

The UT considered a number of grounds of appeal put forward by HMRC against the FTT’s decision, but upheld the FTT’s decision in full.  In doing so the UTT provided some useful commentary on the interpretation of the words “significant influence” in Condition B of the salaried member rules.  A number of key themes can be extracted from the judgement of the UT:

• The test of significant influence (which includes de facto influence) does not apply to the affairs of the BlueCrest LLP generally. An individual member has significant influence even if they only exert that influence over one or two discrete aspects of the financial affairs of the LLP. The UT’s decision was that the bar would be set too high if significant influence is read only to mean significant influence over the entirety of the affairs of the BlueCrest LLP.  Significant influence can potentially be selective influence when viewed across the LLP as a whole;
• “Significant influence” was not limited to the management of the partnership business and could include financial influence or an ongoing contribution from an operational perspective;
• The process of identification of “significant influence” was a “multifactorial” test (stated in paragraph 120 of the UT’s decision). It required a careful analysis of all aspects of the working of the relevant partnership;
• Although there is no one correct methodology, the “find, mind and grind” role, which FTT tribunal judge identified as the role of a traditional partner, was a useful tool in applying the words of Condition B to the facts of this case; and
• HMRC’s assumption that any activity in which an employee might be involved cannot qualify as an activity to be taken into account when considering the question of significant influence was wrong.

The UTT also noted that the key question to be answered when considering Condition A is whether it is reasonable to expect that at least 80% of the relevant employee remuneration payable will be disguised salary.

Applying HMRC v BlueCrest in the future

It is clear from the UTT judgement that the salaried member rules need to be applied alongside a thorough examination of the facts of each case.  In this regard, every partnership will be different.  The roles undertaken genuinely by members will be decisive in the determination of “significant influence”.  The key principles discussed throughout the UT’s judgement will provide invaluable waypoints which LLPs can utilise going forward.  

However, one suspects that this will not be the final time that HMRC places the activities of LLP members under the spotlight, particularly if a suspicion exists that responsibilities have been conjured to fall artificially on the side of the line that avoids employee status.