The UK Supreme Court’s recent BlueCrest ruling could trigger the biggest review of limited liability partnership (LLP) structures in more than a decade, after finding that senior hedge-fund traders should be taxed as employees rather than partners.
Although the £200m tax dispute centred on hedge fund BlueCrest Capital Management, its implications mean that LLPs in accountancy, law, consultancy and other sectors may need to reassess whether their members fall outside the UK’s salaried members rules.
The Supreme Court’s July decision provides long-awaited clarity on what constitutes ‘significant influence’ over an LLP’s affairs. In doing so, it strengthens HMRC’s hand in challenging arrangements where members have been treated as self-employed partners despite functioning more like employees.
The judgment is ‘one of the most significant partnership tax decisions in a decade’
‘The decision will materially change not only how firms interpret the salaried members rules but also how HMRC will apply those rules in future,’ says Minesh Trivedi, head of employment taxes at Claritas Tax.
Disguised employment
The case turned on whether the salaried members rules – introduced to prevent ‘disguised employment’ – require an LLP member to be taxed as an employee rather than as a self-employed partner for income tax and national insurance (NI) purposes.
Members are treated as employees if they satisfy all three statutory conditions:
- Condition A – disguised salary
- Condition B – significant influence
- Condition C – capital contribution.
BlueCrest focused primarily on conditions A and B.
The court found that members had significant responsibility over investment decisions but minimal formal involvement in the LLP’s governance, meaning they met the statutory conditions to be taxed as salaried members.
‘Everybody’s going to have to do a line-by-line review of their partnership agreement’
‘A member’s importance to the business is not enough to satisfy condition B,’ says Gary Rowson, tax partner at Armstrong Watson. ‘The influence must arise from their mutual rights and duties under the LLP agreement. Influence must be over the affairs of the LLP as a whole and is likely to be managerial or strategic, not operational.’
Beyond practice
‘The primary question is not simply what a member does in practice, but what legally enforceable rights and authority their role gives them,’ says Miles Dean, partner and head of international tax at Andersen. ‘Responsibility for a major business line, however commercially important, is not enough on its own.’
That distinction could prove problematic for firms where governance has become increasingly centralised. Many modern LLPs operate through executive boards or management committees, leaving numerous partners with limited formal decision-making powers despite holding senior client-facing positions.
‘Fixed-share and salaried partners are the most exposed’
‘Fixed-share and salaried partners are the most exposed,’ says Fiona Clark, tax partner at Goodman Jones. ‘Where equity partners typically sit on management committees and shape company-wide decisions, in some cases fixed-share members simply don’t, and that gap is exactly what the Supreme Court has focused on.’
Review governance
The consensus among advisers is that LLPs should undertake comprehensive reviews of both their constitutional documents and their governance processes.
Dean says firms should identify precisely which legally enforceable rights support each member’s tax status. ‘Those rights must relate to the affairs of the LLP as a whole,’ he says. ‘LLPs should ensure that their governance documents, committee terms of reference, delegation arrangements and board minutes consistently reflect the governance rights on which members’ tax status depends.’
‘Don’t wait for HMRC to raise the question’
Sean Drury, head of tax at Blick Rothenberg, believes the review needs to be even more fundamental. ‘Everybody’s going to have to do a line-by-line review of their partnership agreement,’ he says. ‘They need to define what strategic influence means for their business, identify which members exercise that influence, and be able to evidence it.’
‘Don’t wait for HMRC to raise the question,’ Clark says. ‘Go back to your partnership agreement and your actual governance practice and test whether members relying on condition B can evidence that influence.’
Financial liabilities
Where HMRC successfully argues that members fall within the salaried members rules, LLPs could face substantial PAYE and employer NI liabilities, together with interest and potential penalties.
‘The financial risk is greatest for LLPs rather than individual members’
‘The financial risk is greatest for LLPs rather than individual members. If HMRC successfully reclassifies a member as a disguised employee, the firm may become liable for secondary class 1 NICs, the Apprenticeship Levy where applicable, plus interest and penalties,’ says Dean.
The scale of the potential exposure is illustrated by the BlueCrest case itself, where HMRC issued PAYE determinations of around £142m and an NIC decision of £55.3m against a single LLP across five tax years.
Drury says the imposition of the 15% employer’s NIC liability to members’ remuneration is a significant ‘win’ for HMRC that may ‘also lay a path towards the general application of national insurance to LLPs’.
Capital contributions
Condition C, concerning capital contributions, was not considered by the Supreme Court because it was outside the scope of the appeal. However, it may now become increasingly important.
Some LLPs may increasingly rely on condition C, which, Dean says, ‘remains the cleanest fix’, since genuine contributions of at least 25% of expected disguised salary are within a firm’s control.
But contributions must represent genuine capital invested at risk, rather than simply satisfying the minimum statutory threshold. ‘It will now be firmly in HMRC’s sights, so capital contributions will need to be genuine contributions of capital at the economic risk of the partner and meet the minimum 25% of expected disguised salary rule,’ Drury says.
‘We may see “Bluecrest 2” appear at the first-tier tribunal shortly, as larger LLPs will find conditions A and B are now more difficult to meet for all their current members.’
