BlueCrest Capital Management has lost its Supreme Court appeal against HMRC, with the UK’s highest court upholding the tax authority’s power to treat a substantial number of the hedge fund’s partners as employees rather than self-employed members.
The unanimous judgment, handed down on 1 July by Lord Richards and Lady Simler, with Lord Briggs, Lord Hamblen and Lord Burrows concurring, is the first test of the salaried member rules to reach the Supreme Court and is expected to affect roughly 50,000 limited liability partnerships across the professional services and investment sectors.
HMRC had pursued BlueCrest, founded by Michael Platt, over PAYE determinations of around £142mn and Class 1 National Insurance contributions of approximately £55.3mn.
The dispute centred on two of the three statutory tests introduced under the Finance Act 2014 to prevent disguised employment within LLPs: Condition A, which asks whether at least 80 per cent of a member’s remuneration amounts to disguised salary, and Condition B, the significant influence test.
BlueCrest had already accepted that Condition C, relating to capital contribution, was satisfied by the relevant members, leaving the case to turn entirely on the other two conditions.
The Supreme Court found that portfolio managers remunerated by reference to profits they individually generated met Condition A regardless of an overall profits cap, and held that significant influence under Condition B must derive from legally enforceable rights and duties tied to the LLP’s affairs generally, not from day-to-day operational control over even a core part of the business.
The salaried member rules were introduced under sections 863A to 863G of the Income Tax (Trading and Other Income) Act 2005, added by the Finance Act 2014 after the government concluded the LLP structure was being used to disguise employment relationships behind partnership tax treatment.
The Supreme Court has remitted the case to the First-tier Tribunal to reconsider BlueCrest‘s position in light of its findings, meaning individual liability is not yet finally settled despite the appeal’s dismissal.
The BlueCrest ruling follows a run of HMRC successes against LLP-based structuring, including the Upper Tribunal’s finding against Boston Consulting Group in January over its treatment of senior staff equity payments, and HMRC’s separate win last month against trader Alex Gerko of XTX Markets over profit allocation through an LLP structure.
The Alternative Investment Management Association and the Managed Funds Association have both signalled concern over the wider implications for UK competitiveness as an investment centre.
Partnership and tax teams will now need to look hard at LLPs built around significant influence rather than capital contribution. Firms that have relied on senior staff having day-to-day control, rather than documented governance rights, should expect that argument to fail if HMRC comes calling next.