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Salaried Members: How influential are you?

Posted on 15 September 2022

The "Salaried Member Rules" were introduced in 2014 to tackle the disguising of employment relationships through LLPs. Broadly, where a partner is more like an employee than a traditional partner, their partnership income will be taxed like normal earnings subject to income tax and National Insurance Contributions (NICs). A partner will be viewed as an employee for these purposes if the following three conditions are met:

  1. At least 80% of the total amount payable by the LLP to the partner is "disguised salary" (broadly meaning fixed, or variable but without reference or relevance to the LLP's profits and losses).
  2. The mutual rights and duties of the partners and of the LLP do not give the partner significant influence over the affairs of the LLP itself.
  3. The partner's contribution to the LLP is less than 25% of the total amount of the disguised salary from the LLP in the tax year concerned.

On 29 June 2022, the First-tier Tax Tribunal (FTT) handed down the first reported judgment on the interpretation of the Salaried Member Rules in the case of Bluecrest Capital Management (UK) LLP v HMRC [2022] UKFTT 204 (TC). The FTT considered the application of the first two conditions to portfolio managers and other senior members of the LLP, which provided investment management and back-office services to other group members.

Whilst the FTT held that Condition A was met, as to Condition B, they made several notable comments. Contrary to HMRC's arguments, "influence" for these purposes was not limited to managerial influence, but could include financial and other forms of influence. Nor did that influence need to be exercised over the affairs of the LLP generally, but could instead be exercised over one aspect of the LLP. In this case, the LLP's activities were twofold: to provide investment advice and back-office services. The portfolio managers exercised significant influence over the former, for which they generated significant returns and therefore had a significant impact on the financial performance of the LLP. However, the same could not be said for those members providing back-office services due to a lack of evidence.

As a result, the Salaried Member Rules did not apply to the investment advice profits of the LLP.

While only a partial victory for the taxpayer, the FTT's purposive approach to "significant influence" is welcomed and (subject to any appeal) will be of wider importance to LLPs.

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