The case of BlueCrest Capital Management (UK) LLP v HMRC [2022] UKFTT 204 (TC) has implications for many LLPs within the professional services and investment management sectors.
Here are some key considerations.
The burden of proof of establishing that condition A or B is not met rests with the appellant. On the balance of probabilities, BlueCrest was unable to satisfy the judge, for condition A, of any concrete link between the discretionary allocations to members and the overall profitability of the LLP and, for condition B, how any of the non-portfolio managers exercised significant influence. This demonstrates the importance of remuneration and executive committees etc. keeping detailed notes of the decisions they make with regards to member remuneration and other key business decisions.
The judge’s reasoning on condition A, which appears sound, may be an issue for firms that have relied on a requirement for the remuneration committee to consider overall profits before finalising individual allocations that are otherwise principally based on personal and/or divisional performance. Whilst there may be some risk that profit allocations could be abated by poor performance by others, this may be insufficient to not be considered disguised salary, even more so where the evidence shows this has not been the case in practice. An inability to materially share in profits that are higher than expected would also appear to be unhelpful.
Firms that require members to contribute sufficient capital to fail condition C, broadly at least 25% of their disguised salary, may need to check that profit tranches which were assumed to fall outside the definition of disguised salary would do so in light of the conclusions in this case.
In reaching his conclusions on condition B, the judge appears to have relied heavily on the overarching purpose of the salaried members rules, being to apply to those members of LLPs who are more like employees in a traditional partnership rather than partners, and his own considerable experience as a partner in a law firm. Broadly, these conclusions can be interpreted as, if an individual would have been promoted to partner or hired as one in a traditional partnership to perform its core activities, then they are likely to exercise significant influence, and, further, individuals not performing core activities are more likely to be akin to employees. There is a feel that the judge has perhaps been overly coloured by his own experience. It seems likely that HMRC will maintain on appeal that ‘significant influence’ should be interpreted more narrowly, requiring managerial influence (not including financial influence) over the overall affairs of the LLP, rather than only over one or more aspects of those affairs. In the meantime, firms should be cautious about relying on the judge’s wider interpretation of significant influence, which appears open to dispute.
Where firms have required members to contribute sufficient capital to fail condition C on the assumption that conditions A and B are met, subject to regulatory and/or working capital needs, there may be a temptation for members to seek repayments of their capital on the grounds that condition B is failed on the basis of this judgement. As noted, this would not be recommended until the outcome of any appeal is determined.
Although particular to the facts and evidence presented in this case, it is notable that the UK ExCo members were determined not to have significant influence. This shows that the appointment of an individual to an executive committee, particularly one who is not otherwise performing the core activities of the business, may not necessarily be sufficient to demonstrate that they exert significant influence. Firms may need to check the evidence supporting the position for these members where they are relying on failing condition B to fall outside of the salaried members rules.
Finally, the engagement of the targeted anti-avoidance rule (TAAR) is, at first blush, a little concerning as many firms will have taken steps to ensure that their members were not caught by the salaried members rules. Presumably, however, the judge considered that the steps taken in this case were little more than presentational, with no actual change made as to how the profit allocations were determined. A genuine change to the profit-sharing arrangements bringing about a concrete link between members’ profit allocations and the profitability of the LLP should not be caught by the TAAR. However, firms would be advised to check whether any changes made for the purposes of preventing the salaried members rules applying are sufficiently substantive.
The case of BlueCrest Capital Management (UK) LLP v HMRC [2022] UKFTT 204 (TC) has implications for many LLPs within the professional services and investment management sectors.
Here are some key considerations.
The burden of proof of establishing that condition A or B is not met rests with the appellant. On the balance of probabilities, BlueCrest was unable to satisfy the judge, for condition A, of any concrete link between the discretionary allocations to members and the overall profitability of the LLP and, for condition B, how any of the non-portfolio managers exercised significant influence. This demonstrates the importance of remuneration and executive committees etc. keeping detailed notes of the decisions they make with regards to member remuneration and other key business decisions.
The judge’s reasoning on condition A, which appears sound, may be an issue for firms that have relied on a requirement for the remuneration committee to consider overall profits before finalising individual allocations that are otherwise principally based on personal and/or divisional performance. Whilst there may be some risk that profit allocations could be abated by poor performance by others, this may be insufficient to not be considered disguised salary, even more so where the evidence shows this has not been the case in practice. An inability to materially share in profits that are higher than expected would also appear to be unhelpful.
Firms that require members to contribute sufficient capital to fail condition C, broadly at least 25% of their disguised salary, may need to check that profit tranches which were assumed to fall outside the definition of disguised salary would do so in light of the conclusions in this case.
In reaching his conclusions on condition B, the judge appears to have relied heavily on the overarching purpose of the salaried members rules, being to apply to those members of LLPs who are more like employees in a traditional partnership rather than partners, and his own considerable experience as a partner in a law firm. Broadly, these conclusions can be interpreted as, if an individual would have been promoted to partner or hired as one in a traditional partnership to perform its core activities, then they are likely to exercise significant influence, and, further, individuals not performing core activities are more likely to be akin to employees. There is a feel that the judge has perhaps been overly coloured by his own experience. It seems likely that HMRC will maintain on appeal that ‘significant influence’ should be interpreted more narrowly, requiring managerial influence (not including financial influence) over the overall affairs of the LLP, rather than only over one or more aspects of those affairs. In the meantime, firms should be cautious about relying on the judge’s wider interpretation of significant influence, which appears open to dispute.
Where firms have required members to contribute sufficient capital to fail condition C on the assumption that conditions A and B are met, subject to regulatory and/or working capital needs, there may be a temptation for members to seek repayments of their capital on the grounds that condition B is failed on the basis of this judgement. As noted, this would not be recommended until the outcome of any appeal is determined.
Although particular to the facts and evidence presented in this case, it is notable that the UK ExCo members were determined not to have significant influence. This shows that the appointment of an individual to an executive committee, particularly one who is not otherwise performing the core activities of the business, may not necessarily be sufficient to demonstrate that they exert significant influence. Firms may need to check the evidence supporting the position for these members where they are relying on failing condition B to fall outside of the salaried members rules.
Finally, the engagement of the targeted anti-avoidance rule (TAAR) is, at first blush, a little concerning as many firms will have taken steps to ensure that their members were not caught by the salaried members rules. Presumably, however, the judge considered that the steps taken in this case were little more than presentational, with no actual change made as to how the profit allocations were determined. A genuine change to the profit-sharing arrangements bringing about a concrete link between members’ profit allocations and the profitability of the LLP should not be caught by the TAAR. However, firms would be advised to check whether any changes made for the purposes of preventing the salaried members rules applying are sufficiently substantive.
