LLP managers will be pleased that the Upper Tribunal has upheld the FTT decision although, in terms of advancing the law in this area, the decision is a bit of an anti-climax.
Readers may recall that the FTT had decided that portfolio managers with a book of at least $100m had significant influence and failed Condition B (and so were not salaried members). The FTT also decided that the bonuses paid to traders were disguised salary for the purposes of Condition A (BlueCrest Capital Management (UK) LLP v HMRC [2022] UKFTT 204 (TC)).
The UT’s decision ([2023] UKUT 232 (TCC)) does not really advance the debate – basically holding that the FTT judge was entitled to reach the decisions he did. As the FTT decision was seen as positive for taxpayers in relation to Condition B, the upholding of the decision should likewise be seen as good news. The FTT and UT decisions clearly show that the Condition B line is not drawn where HMRC have been asserting recently in practice and, in particular, that significant influence does not need to be over the entirety of the affairs of the LLP and can arise through any type of activity.
The UT decision also does not advance matters particularly in relation to Condition A, merely agreeing that the bonuses were disguised salary. The UT agreed with the FTT that, to avoid disguised salary status, there must be a sufficient link between the overall amount of profits and losses of the LLP and the payment in question and that this requires something more than the possibility of there being insufficient profits to pay discretionary allocations. While the UT decision does not advance matters, the helpful guidance on applying Condition A given by the FTT has not been undermined.
The futility of the appeal (and the reason for the anti-climax) was summarised by the UT where it stated:
‘The reality was, and is that, in the absence of the Judge making some mistake in his construction of and approach to the Condition B question and/or the Condition A question, it was always going to be a difficult task to persuade this tribunal, as an appeal tribunal, that the Judge had made an error in his findings of fact of the kind which would permit this tribunal to interfere with those findings.’
Our conclusions to the FTT decision therefore remain and we repeat them below for ease of reference.
The decision has not really changed our view in relation to Condition A. To fail Condition A, the variable allocation needs to be a top down allocation which starts with the overall profits of the LLP and, while other factors can influence the final allocation amount to an individual, a concrete link with the overall profits must be maintained.
In relation to Condition B, the decision materially broadens the availability of significant influence beyond HMRC’s current approach in practice. On Condition B, the test is almost to ask whether the firm draws the line between member and employee at an appropriately senior level. If they do, and the significant influence of the member to the financial or operational aspects of the business can be evidenced, based on this decision, they will have significant influence and not be salaried members.
The UT decision in relation to Condition B restates what we all knew, which is that each case will be entirely fact dependent and depend on a careful analysis of all aspects of the workings of the relevant LLP.
While there will be no requirement for a judge in a future case to adopt the same approach that the FTT did in BlueCrest (i.e. comparing to the position in a traditional law firm partnership), they should not apply the test in the restrictive way HMRC were seeking in BlueCrest and have been asserting in practice.
Home >Articles > Salaried member rules: the Upper Tribunal's decision in BlueCrest
Salaried member rules: the Upper Tribunal's decision in BlueCrest
LLP managers will be pleased that the Upper Tribunal has upheld the FTT decision although, in terms of advancing the law in this area, the decision is a bit of an anti-climax.
Readers may recall that the FTT had decided that portfolio managers with a book of at least $100m had significant influence and failed Condition B (and so were not salaried members). The FTT also decided that the bonuses paid to traders were disguised salary for the purposes of Condition A (BlueCrest Capital Management (UK) LLP v HMRC [2022] UKFTT 204 (TC)).
The UT’s decision ([2023] UKUT 232 (TCC)) does not really advance the debate – basically holding that the FTT judge was entitled to reach the decisions he did. As the FTT decision was seen as positive for taxpayers in relation to Condition B, the upholding of the decision should likewise be seen as good news. The FTT and UT decisions clearly show that the Condition B line is not drawn where HMRC have been asserting recently in practice and, in particular, that significant influence does not need to be over the entirety of the affairs of the LLP and can arise through any type of activity.
The UT decision also does not advance matters particularly in relation to Condition A, merely agreeing that the bonuses were disguised salary. The UT agreed with the FTT that, to avoid disguised salary status, there must be a sufficient link between the overall amount of profits and losses of the LLP and the payment in question and that this requires something more than the possibility of there being insufficient profits to pay discretionary allocations. While the UT decision does not advance matters, the helpful guidance on applying Condition A given by the FTT has not been undermined.
The futility of the appeal (and the reason for the anti-climax) was summarised by the UT where it stated:
‘The reality was, and is that, in the absence of the Judge making some mistake in his construction of and approach to the Condition B question and/or the Condition A question, it was always going to be a difficult task to persuade this tribunal, as an appeal tribunal, that the Judge had made an error in his findings of fact of the kind which would permit this tribunal to interfere with those findings.’
Our conclusions to the FTT decision therefore remain and we repeat them below for ease of reference.
The decision has not really changed our view in relation to Condition A. To fail Condition A, the variable allocation needs to be a top down allocation which starts with the overall profits of the LLP and, while other factors can influence the final allocation amount to an individual, a concrete link with the overall profits must be maintained.
In relation to Condition B, the decision materially broadens the availability of significant influence beyond HMRC’s current approach in practice. On Condition B, the test is almost to ask whether the firm draws the line between member and employee at an appropriately senior level. If they do, and the significant influence of the member to the financial or operational aspects of the business can be evidenced, based on this decision, they will have significant influence and not be salaried members.
The UT decision in relation to Condition B restates what we all knew, which is that each case will be entirely fact dependent and depend on a careful analysis of all aspects of the workings of the relevant LLP.
While there will be no requirement for a judge in a future case to adopt the same approach that the FTT did in BlueCrest (i.e. comparing to the position in a traditional law firm partnership), they should not apply the test in the restrictive way HMRC were seeking in BlueCrest and have been asserting in practice.
