The recent Upper Tribunal decision in the Bluecrest case has confirmed the earlier FTT decision which considered the salaried member rules for LLPs.
These rules were introduced in 2014 and treat a member of an LLP as an employee for tax purposes (with the resulting PAYE and NIC consequences) if three conditions are met. These conditions relate to:
- the extent to which remuneration varies with the profits of the LLP;
- whether the member has significant influence over the activities of the partnership; and
- the level of capital contribution to the LLP.
The provisions treat as employees those partners who are in reality much more like employees than partners. These are partners whose remuneration is effectively “disguised salary” with little or no reference to the LLP’s profits, who do not have significant influence over the LLP’s activities and who contribute little or no capital to the LLP.
To be treated as an employee, all three conditions must be met. It is therefore necessary to fail at least one of the three conditions to be treated as self-employed for tax purposes.
Two of these conditions were considered in the Bluecrest case.
- The payments to the members in that case were based on individual performance without any real reference to the underlying profits of the LLP. This is much more like an employment relationship where employees are paid a base salary and a bonus based on their own performance. The case confirms that a link is needed between the LLP’s profits and payments to the member which is more than the LLP simply having or not having enough to pay.
- There had been some uncertainty about whether only managerial influence should be considered when determining whether an individual exercises significant influence over the LLP’s activities. This decision has confirmed that it is necessary to look at the activities of the partnership and then decide whether there is significant influence over any part. Managerial influence is not the only relevant factor; if it were, very few partners would be able to fail this condition in the many professional service firms where management is delegated to a core management team. However, ensuring that there is sufficient evidence to demonstrate the influence of the LLP member over the relevant activities will be vital.
Whilst confirmation of the earlier FTT was not unexpected, the decision is helpful precisely because it does not disturb that earlier FTT decision, and so will likely be welcomed particularly by those who are currently in discussions with HMRC about the status of their members as well as by those who are part of a due diligence process relating to an LLP.
However, how the rules apply to each LLP will depend on the facts, and how each LLP operates and is governed will need to be considered carefully.