HMRC v Bluecrest Capital Management: HMRC tripping on the Bluecrest of a wave

Introduction

 

The Upper Tribunal (UT) recently delivered its verdict in HMRC V Bluecrest Capital Management (UK) LLP.

 

In doing so, it upheld the decision of the First-tier Tribunal (FTT).

 

The case is an important one as it one of the first to considers the application of the salaried members rules, introduced in Finance Act 2013.

 

Let’s unpack the key points from the ruling.

 

The legislative background

 

Before diving into the UT’s decision, it is worth pausing a moment to understand the legislation in this area.

 

In order form the salaried member rules to be engaged, three key conditions must be satisfied.

 

If the three conditions are satisfied, then the LLP member to be treated as an employee for tax purposes.

 

As you will know, this will have adverse tax impacts.

 

The conditions are as follows:

 

Condition  

Description

 
Condition A  

At least 80% of the member’s remuneration must qualify as “disguised salary.” This means it is either fixed or variable but not linked to the overall profits or losses of the LLP.

 
Condition B  

The member’s rights and duties, both among themselves and with the LLP, should not grant significant influence over the LLP’s affairs.
 

Condition C

  

The member’s contribution to the LLP should be less than 25% of the reasonably expected disguised salary.

 

The FTT’s decision, upheld by the UT, found that Condition C was met, but it’s the analysis of Conditions A and B that holds particular significance.

 

The FTT’s decision

 

The FTT made several key determinations:

 

Condition A The FTT found that this condition was met for all relevant LLP members. It concluded that the remuneration, although discretionary, did not depend on the overall profits or losses of the LLP.

The mere possibility of reducing individual awards in case of insufficient overall profit was insufficient.

It highlighted that while remuneration need not precisely mirror the LLP’s profits and losses, it should have some reference to them.
Condition B The FTT ruled that Condition B was not satisfied for specific portfolio managers and desk heads with portfolios exceeding US$100 million.

 

These individuals were deemed to have significant influence over the affairs of the LLP.

 

The FTT expanded the definition of “significant influence” beyond managerial control, emphasizing that it could pertain to any aspect of the partnership’s affairs.

The Upper Tier’s decision

 

The UT essentially concurred with the FTT’s interpretations of Conditions A and B, offering more nuanced reasoning:

 

Condition A The UT’s decision emphasizes that Condition A necessitates a reasonable expectation that at least 80% of total remuneration constitutes disguised salary, falling into specific categories:

 

  • Fixed amount
  • Variable but without reference to LLP profits/losses
  • Variable but not in practice affected by LLP profits/losses.

 

The UT introduced a two-level test to evaluate this condition:

 

  1. Does the link qualify in principle to permit remuneration to fall outside these categories?
  2. Even if the link qualifies in principle, what is the reasonable expectation? On the facts, if there’s a reasonable expectation of sufficient profits such that discretionary allocations remain unaffected, it would still fall within the above categories.

 

The UT determined that the need for sufficient profits did not qualify since it was too indirect.

 

Ultimately, it asserted that Condition A was designed to “isolate payments of the kind one would find in a traditional partnership.” This ruling aligns with the need for a clear linkage between remuneration and profits.

 
Condition B The UT rejected any rigid tests or gloss to define “significant influence” in Condition B.

 

Instead, it emphasised that this determination is acutely fact-sensitive.

 

The UT upheld the broader interpretation of “significant influence,” which could encompass responsibility for operational activities, financial performance, financial responsibility, or managerial roles.

Conclusion

 

The UT’s ruling on Condition A may not be surprising given the facts of the case.

 

However, the UT’s strict interpretation reaffirms that taxpayers need a robust linkage between remuneration and LLP profits to satisfy this condition.

 

Condition B perhaps raises the more interesting issues.

 

The UT’s refusal to impose a rigid definition of “significant influence” perhaps does not assuage any general concerns that interested taxpayers might have over what is very broad-brush legislation.

 

It seems likely that HMRC will attempt to appeal this case, particularly around Condition B.

 

But for now, HMRC will have to drag themselves out of the surf and dry themselves off.

 

If you have any queries regarding this article regarding HMRC v Bluecrest Capital Management or any other tax matters, then please do get in touch