Salaried members rules hit hedge fund bonuses

In Bluecrest Capital Management (UK) LLP v HMRC [2022] TC8529, the First Tier Tribunal (FTT) held that the salaried members' rules applied to payments made to members of an LLP as disguised salary. Certain bonus payments escaped the rules as the recipient members had significant influence over the Partnership.

Since 2014 the Salaried members' rules at section 863A - G of ITTOIA 2005 have applied to deem a member of a Limited Liability Partnership (LLP) to be an Employee for tax purposes where three conditions are met.

• Condition A: At least 80% of their reward for the performance of their services as a member of the LLP is 'disguised salary', fixed or variable, without regard to the overall profits/losses of the partnership.
• Condition B: The mutual rights and duties of the members of the LLP and of the partnership and its members do not give them significant influence over the affairs of the partnership.
• Condition C: They have no significant money investment in the LLP i.e. their contribution is less than 25% of their disguised salary.

The BlueCrest Group is involved in worldwide financial asset management. Bluecrest Capital Management (UK) LLP (Bluecrest) is a mixed-member LLP that is part of the Group.

• Bluecrest is a hedge fund manager providing support services around the group with its own investment management business.
• It has never had any direct employees. It employs its more junior investment managers and many of the back-office staff (c.200 staff in total) via a service company.
• Bluecrest’s members are split into three categories:
  • Infrastructure members (support/back office including department heads).
  • Discretionary traders/portfolio managers including desk heads were distinguished from the rest by the First Tier Tribunal (FTT) as many had a capital allocation in the LLP of over $100 million. 
  • Other front office members (researchers/technologists).  
• The members received three categories of remuneration in the tax years in question:
  • Priority distributions, resulting in individual members receiving a fixed amount each month i.e. a fixed salary.
  • Discretionary allocations, which were determined at the discretion of the board, i.e. bonuses.
  • Income points allocations. These were any remaining profits after discretionary allocations, by reference to the 'income points' held by each member. They were insignificant for the individual members, being weighted in favour of the corporate members who also took 100% of the LLP losses. They were not considered during the appeal.
• HMRC raised determinations across five tax years for a total of £199,233,648 in PAYE and National Insurance Contributions (NICs) on the basis that the salaried members' rules applied. Bluecrest appealed.

The FTT partially allowed the appeals.

Condition C

• It was already agreed by the parties that Condition C applied to all members. 

Condition A

• The parties agreed that the priority distributions (fixed salaries) met Condition A.
• The FTT found that the discretionary allocations (bonuses) also met Condition A.
  • They represented disguised salary which was variable without reference to the overall amount of the profits or losses of business and was not in practice, affected by the overall amount of those profits or losses.
  • The bonuses received instead varied by reference to the members’ personal performances and the possibility of losses or risk, including the impact of the COVID pandemic and the outcome of the appeal itself on the LLP, were not factored into the variable remuneration calculations.
  • Whilst the board had discretion over the bonuses this was fettered by the variable reward methodology which the LLP agreed with each portfolio manager when they joined the firm.

Condition B

It was then necessary to consider condition B as if this was met, all payments in question to all types of individual members would be subject to PAYE and NICs, instead of being self-employment income which was how they had been treated.

• The portfolio managers with capital allocations of $100m or more and the desk heads, irrespective of their capital allocation, did not meet condition B. The appeal was allowed in this respect.
  • Significant influence is not limited to managerial influence. The portfolio managers had significant financial influence over the activities of the LLP by virtue of their capital allocations which also gave them greater influence over managerial decisions.
  • The desk heads had significant influence despite reduced (or zero) capital allocations as they were also portfolio managers and were responsible for monitoring the day-to-day performance of other portfolio managers, playing an important role in setting individual portfolio managers’ capital allocations, in recruitment and in new product initiatives.
• All other members (non-portfolio managers, front office and back office/support staff) met condition B.
  • They did not have significant influence over either the investment or service provision elements of the LLP’s activities. They were not carrying out the role of a partner in a traditional partnership but rather that of an employee. Since conditions A and C had already been met, PAYE and NICs applied to all payments to these members.

This is a complex and lengthy case. The decision does not specify how much of the £200m assessed by HMRC will now be due. Presumably, the total will be substantial.

It may be that Bluecrest will appeal the decision as this is relatively new legislation which has not yet been tested in the higher courts, making this decision a significant one despite it not having legal precedent.

UPDATE: This case has been appealed to the Upper Tribunal.

Useful guides on this topic

Salaried members: When is a partner taxed as an employee?
In some circumstances, LLP members are taxed as employees under PAYE. When does this apply? 

Mixed members: Partnerships with company members
What is a mixed-member partnership? How are profits of a mixed-member partnership taxed? What tax adjustments are required? Are there any relieving provisions?

Employment status: Partners
What is the employment status of a partner in a partnership or a member of an LLP? Are partners/members employed or self-employed?

Running an LLP in tandem with a company
It is possible to run a Limited Liability Partnership (LLP) or another form of partnership in tandem with a company. Partnerships can also have corporate partners. What needs to be considered?

External link

Bluecrest Capital Management (UK) LLP v HMRC [2022] TC8529