A significant legal development has once again highlighted the need for Limited Liability Partnerships (LLPs) to carefully consider HMRC’s Salaried Member Rules.
The Court of Appeal’s recent decision in favour of HMRC against BlueCrest Capital Management (UK) LLP draws attention to the potential financial repercussions of non-compliance. The hedge fund management company now faces a potential tax bill of nearly £200 million after the court found that members of the firm failed to meet two of the three conditions outlined in the Salaried Member Rules which must be met in order for them to be classified as members for income tax and national insurance purposes, rather than being deemed as employees. These conditions are known as conditions A, B and C.
Interpretation of Condition B
In this case, which has been referred to the first-tier tribunal for reconsideration, HMRC had argued that all but four members of BlueCrest ‘enjoyed disguised salaries’, relating to Condition A of the Salaried Member Rules.
The interpretation of Condition B has attracted particular attention. This condition prevents an individual being classed as an employee (salaried member) if they have significant influence over the affairs of the LLP.
Significant influence relates to the level of control and management an individual has within the firm and how much say they have in relation to business decisions. The Court of Appeal held that the significant influence of a member must derive from the legal and contractual framework of the LLP, suggesting LLPs cannot rely on informal arrangements in order to meet Condition B.
HMRC’s focus on future compliance
In 2024 the revenue updated the guidance around the Salaried Member Rules in relation to Condition C, which considers a members capital contribution. While there was some concern, this wasn't a change of legislation. It gave an insight into HMRC’s interpretation of current legislation and perhaps an indication that this was a specific area HMRC would focus on with future compliance reviews. Following a recent consultation with Chartered Institute of Taxation (CIOT), HMRC have confirmed that this guidance is going to be updated in order to clarify condition C further.
Ultimately, the financial implications of non-compliance in this area lands on employers. LLPs must ensure they are correctly applying the provisions set out by HMRC. A firm will naturally check its numbers relating to conditions A and C, but this case highlights the need for LLPs to be regularly reviewing partnership agreements, specifically in relation to a member’s influence.
Similarly, we have seen more challenges regarding the use of consultants within law firms. LLPs, especially law firms, must also be vigilant about the employment status of consultants. The use of consultants, including ex-partners and client-facing consultants, presents specific tax challenges. For instance, ex-partners re-engaged as self-employed consultants must demonstrate independence from the firm and operate in business on their own account.
It may be that with greater resources in its compliance department the revenue could be focusing on these rules and we may see more challenges relating to the Salaried Members Rules and, similarly, the tax treatment of consultants.
If you would like further tax advice in this area, please get in touch. Call 0808 144 5575 or email help@armstrongwatson.co.uk.
