Salaried member rules: Court of Appeal decision in BlueCrest case

The much-awaited judgement from the Court of Appeal (CA) was released on 17 January, overturning the decisions of the First-tier Tribunal (FTT) and Upper Tribunal (UT), and providing a much narrower interpretation of ‘significant influence’.

Members of LLPs are generally taxed as self-employed, rather than employees, which can give a significant saving in NICs. The salaried members’ legislation taxes members as employees in some circumstances, generally where their work relationship is similar to an employment relationship.

Under the salaried members’ legislation, if three specific conditions are met then a member will be taxed as an employee. HMRC had assessed members of this LLP as meeting all three conditions, A, B, and C, and much of this decision focuses on Condition B. 

Significant influence and qualifying influence

The CA determined that significant influence in the context of Condition B must be ‘the affairs of the partnership generally, viewed as a whole …. the affairs of the LLP are broader than, although they include, the business of the LLP’. The CA considers that significant influence better aligns with strategic decision making, rather than performance of duties in conducting the business.

The CA also introduced the concept of ‘qualifying influence’ and ‘non-qualifying influence’. It provided an example of where the co-founder of the BlueCrest group, who was not an LLP member, had ‘non-qualifying influence’ on the basis that none of his roles “had its origin in any of the mutual rights and duties of the members”. Such ‘non-qualifying influence’ is therefore relevant when determining whether or not the ‘qualifying influence’ of the LLP members could be significant.

Mutual rights and duties

The judgement focussed on the principle that a member’s influence will be determined by the ‘mutual rights and duties’ that they have. The default provisions for the ‘rights and duties’, in the LLP regulations provide that ‘every member may take part in the management of the limited liability partnership’. If these provisions do not apply, then it will be necessary to determine what ‘rights and duties’ are provided for within the LLP agreement. In this case, the LLP’s agreement provided that none of the default provisions within the LLP regulations applied, and therefore the focus had to be on the terms within the LLP agreement.

In particular, the CA noted that the narrower definition of Condition B does not look beyond the enforceable rights and duties of the members in identifying the qualifying influence which they may have over the LLP's affairs.

HMRC’s published guidance

These principles diverge from HMRC’s published guidance that states if “the written agreement is not being followed and on a realistic view of the facts, the member does exercise significant influence over the affairs of the LLP as a whole then Condition B is not satisfied”.

CA decision

The CA found that both the FTT and UT made an error of law in accepting the wider construction of Condition B which is reflected in HMRC's published guidance. In particular, it noted that the FTT carried out its analysis “on the mistaken basis that the necessary qualifying influence on the affairs of the LLP could be found not only in the LLP Agreement and any other sources of enforceable mutual rights and duties, but also in any de facto arrangements which were in place from time to time, however informal they may have been, and whether or not they were legally enforceable.”

The CA has remitted the appeal to the FTT for reconsideration in the light of the correct construction of Condition B.

While this will be a disappointing judgment for LLP members, it should be noted that there continues to be broader uncertainty regarding the application of the salaried member rules. With HMRC’s internal review on its updated guidance on an aspect of Condition C (top ups of capital contributions) pending, some firms will find themselves waiting uncomfortably for further clarification.

Given the amount of tax at stake, it is considered likely that there will be an appeal to the Supreme Court, which must happen within 28 days.

At this stage, it is too early to tell how this might influence HMRC’s current approach to the legislation, particularly on a retrospective basis given that the position taken by the CA diverges from HMRC’s own guidance.

In the meantime firms can take practical steps by reviewing:

• Their existing salaried member testing processes and associated documentation, including, but not limited to, decisions regarding the allocation of profit shares
• The rights and duties of the members provided for within the LLP Agreement, particularly with reference to governance / decision making and control

If you would like to discuss the implications this could have for your firm, do get in touch with your usual contact or one of the contacts listed.

Approval code: NTEH7012502