The Commissioners for HMRC v Bluecrest Capital Management (UK) LLP

The salaried-member rules deem an LLP member to be an employee for tax purposes only when all three statutory conditions are met. Under Condition B, significant influence must derive from legally enforceable mutual rights and duties under the statutory and contractual framework governing the LLP, ordinarily the LLP agreement where default rules are excluded. Informal or de facto influence cannot itself qualify, although it may assist in assessing whether qualifying influence is significant. The relevant affairs are those of the partnership generally, viewed as a whole and in its wider group context. For Condition A, remuneration remains disguised salary where an otherwise profit-independent variable award is merely capped by the LLP’s overall profits. The case was remitted for reconsideration under the correct approach.

HMRC assessed Bluecrest Capital Management (UK) LLP to PAYE and national insurance contributions on the basis that most of its members were salaried members. The First-tier Tribunal allowed the appeal for portfolio managers with capital allocations of at least $100 million and desk heads, but dismissed it for other members. The Upper Tribunal dismissed both HMRC’s appeal and the LLP’s cross-appeal: [2023] UKUT 00232 (TCC).

HMRC appealed on the construction of Condition B in the Income Tax (Trading and Other Income) Act 2005. The LLP pursued a protective cross-appeal and argued by respondent’s notice that portfolio managers and desk heads also failed Condition A. The central questions were the source and scope of significant influence under Condition B and whether discretionary profit allocations constituted disguised salary.

Sir Launcelot Henderson delivered the judgment of the court. Arnold LJ and Lewison LJ agreed.

1. Condition B. Applying the statutory interpretation principles restated in R (O) v Secretary of State for the Home Department [2022] UKSC 3, the enacted words were the primary source of meaning. The words requiring significant influence to be given by the mutual rights and duties of the members and the LLP could not be treated as surplusage.
2. The relevant influence must derive from legally enforceable mutual rights and duties under the statutory and contractual framework governing the LLP. The relevant framework included section 5(1) of the Limited Liability Partnerships Act 2000, the default rules in regulation 7 of the Limited Liability Partnerships Regulations 2001, and the LLP agreement. Since the agreement excluded the default rules and contained an entire-agreement clause, it was the principal source of qualifying influence.
3. De facto influence without an identifiable statutory or contractual source was non-qualifying. It could nevertheless be relevant when assessing whether qualifying influence was significant. The relevant affairs were the partnership’s affairs generally, viewed as a whole and in the wider group context. Significant influence meant more than insignificant influence and had to possess practical and commercial substance.
4. The FTT and Upper Tribunal had applied the wrong legal test by treating informal factual influence as sufficient. The error went to the heart of the evidence and could have affected the outcome. The Court of Appeal therefore allowed HMRC’s appeal, set aside the Upper Tribunal’s decision and remitted the case to the FTT. The FTT should decide the appropriate directions. The court was not presently persuaded that further evidence should automatically be admitted.
5. The procedural objection to HMRC’s fallback construction argument failed. A court must decide a question of statutory construction for itself and is not bound by a party’s concession. The interests of justice, fairness and any prejudice remained relevant, but the proposed argument was a pure question of law and the LLP had not shown material prejudice.
6. Condition A was satisfied for all relevant members, including portfolio managers and desk heads. Under section 863B(3)(b) of the Income Tax (Trading and Other Income) Act 2005, a variable discretionary allocation was disguised salary where it was determined without reference to the LLP’s overall profits, even though those profits could operate as a cap. The court therefore made a declaration that Condition A was met.

• Court of Appeal: HMRC’s appeal allowed. The Upper Tribunal decision was set aside and the case remitted to the First-tier Tribunal. A declaration was made that Condition A was met for all relevant members.
• Upper Tribunal (Tax and Chancery Chamber): HMRC’s appeal and Bluecrest’s cross-appeal were dismissed: [2023] UKUT 00232 (TCC).
• First-tier Tribunal: The appeal was allowed for portfolio managers with capital allocations of at least $100 million and desk heads, but dismissed for other members: [2022] UKFTT 204 (TC).