On Monday 18th September the Upper Tribunal (UT) released their judgement on HMRC v BlueCrest Capital Management (UK) LLP [2023] UKUT 00232 (TCC). The case was the first test of the UK’s salaried member legislation, the conclusions of which have wide-ranging implications for UK based asset managers with an LLP structure.

HMRC appealed against the First-Tier Tax Tribunal’s (FTT) decision on Condition B, which found that the portfolio managers did indeed have significant influence and should therefore be regarded as true partners. The UT dismissed HMRC’s appeal (made on nine specific grounds) and has provided further support on a number of areas:

“As a matter of construction of the wording of Condition B, and as a matter of the purpose behind this legislation, we consider that the bar is set too high if the significant influence in Condition B is read only to mean significant influence over the entirety of the affairs of the relevant partnership.”

“In our view, to say, as HMRC do, that financial impact upon the business of the partnership cannot qualify as a source of significant influence is misconceived. Those with experience of working within or for a partnership will be aware that financial performance and/or financial responsibility usually equals “clout” in any partnership, or for that matter in any entity or organisation.”

“There is nothing in the wording of Condition B which restricts the types of activity or sources of influence within a partnership which can be considered for the purposes of deciding whether an individual meets or fails Condition B.”

In addition, there was a cross appeal made by BlueCrest in relation to Condition A. The FTT found that in practice the partners profits were not affected by the overall profits and losses of the partnership. The overwhelming factor that was used to determine discretionary allocations was personal performance alone. As such the discretionary allocations could fall within the definition of a disguised salary under limb (b) or (c). Again, the UT agreed with the decision made by the judge at the FTT level, dismissing the appeal, stating that:

“Discretionary allocations were calculated without reference to the variability of profits. Profits could only become relevant, at a second or separate stage, if it turned out that they were insufficient to pay the discretionary allocations already calculated.”

“We consider that the threshold test in Paragraph (b) and in Paragraph (c) is set fairly widely. In the case of the discretionary allocations however, the taxpayer was unable to show the link required to take the discretionary allocations outside Paragraph (b) or Paragraph (c), either as a matter of construction or on the evidence.”

“The Condition A question is therefore concerned with what it is reasonable to expect. This question has to be answered at the relevant time, as defined in Section 863B(3). As we understood the submissions of the parties, this meant, in the present case, looking at the position on a year-by-year basis.”

In summarising the UT stated that:

“In the absence of the Judge making some mistake in his construction of and approach to the Condition B question and/or the Condition A question, it was always going to be a difficult task to persuade this tribunal, as an appeal tribunal, that the Judge had made an error in his findings of fact of the kind which would permit this tribunal to interfere with those findings.”

What does this mean for asset managers?

In relation to Condition B, confirmation of this position will be broadly welcomed across the industry. Anyone who has worked inside an asset management business will recognise the managerial clout that portfolio managers wield. Given that portfolio managers tend to take home the largest proportion of profits this materially reduces the risk for taxpayers. However, there was no further clarity for other roles within an asset management business so consideration will need to be given as to what extent these findings can be more broadly applied.

On Condition A, given the facts of the case, this result is perhaps not unexpected. However, it emphasises the importance of maintaining robust evidence to support your position – in particular that expectations need to be determined and documented at the relevant time.

The details of the appeal are available at: https://assets.publishing.service.gov.uk/media/65082ec84cd3c3001468cb90/Bluecrest_Capital_Management__UK__LLP_FINAL__002_.pdf

A summary of the original case can be found here: https://larkstoke-advisors.com/2022/07/06/bluecrest-salaried-member-case-digest-tc-2019-09328-bluecrest-capital-management-uk-llp-vs-hmrc/

In addition please see our article in AIMA on the same subject: https://larkstoke-advisors.com/2022/09/22/bluecrest-salaried-member-case-digest-a-positive-result-for-the-industry-but-by-no-means-the-end-of-the-story/

And finally, in terms of how to evidence your position:https://larkstoke-advisors.com/2023/02/20/salaried-members-legislation-documenting-your-position/