Court of Appeal shuns Upper Tribunal’s interpretation of salaried members rules

The salaried members rules treat individual members of an LLP as employees for the purposes of income tax and National Insurance where three conditions are met. The rules aim to prevent individuals from benefitting from the lower tax rates available to self-employed individuals without taking on the risks and responsibilities associated with owning a business.

In HMRC v Bluecrest Capital Management (UK) LLP, the case concerns the application of condition B, which applies where the member does not have significant influence over the affairs of the LLP. The members of the LLP (BC) in question contended that some portfolio managers did have significant influence, as they were each managing over $100m investments. The First-tier Tribunal (FTT) and the Upper Tribunal (UT) agreed with BC that “significant influence” can mean influence over part of the LLP’s affairs. However, the Court of Appeal found that the FT and UT had erred in law. It was confirmed that in order to “fail” condition B, a member’s influence should apply to the affairs of the whole LLP and must be held via legally enforceable rights and duties of members, i.e. the LLP agreement. The appeal was allowed, the court set aside the decision of the UT and has remitted the case to the FTT for reconsideration.

Members of LLPs should review the application of the salaried members rules if they, like BC in this case, previously relied on HMRC guidance in respect of the level of influence required.