How safe is your LLP tax position?

A recent Supreme Court decision could have significant tax implications for businesses operating through Limited Liability Partnerships (LLPs).

Under LLP rules, members are generally treated as self-employed for Income Tax and National Insurance purposes. However, the salaried member rules, introduced in 2014, determine whether an individual should instead be treated as an employee for tax purposes.

The Supreme Court's decision in HMRC v BlueCrest Capital Management (UK) LLP has provided important clarification on these rules – and could prompt many LLPs to review their existing arrangements.

What happened in the BlueCrest case?

BlueCrest Capital Management challenged HMRC's attempts to treat a number of its LLP members as employees for tax purposes.

The case centred on whether those members had sufficient ‘significant influence’ over the LLP to avoid being caught by the salaried member rules.

The Supreme Court upheld the Court of Appeal's narrower interpretation of the legislation, finding that only influence arising from legally enforceable rights and duties should be considered.

Informal or ‘de facto’ influence resulting from an individual's performance, experience, relationships or standing within the business does not count.

The decision could reportedly leave BlueCrest facing a tax liability of around £200 million and may have wider implications for professional services, investment firms and other businesses operating as LLPs.

How do the salaried member rules work?

For an LLP member to be treated as a salaried member, all three of the following conditions must be met:

• Condition A: At least 80% of the member's remuneration is broadly a ‘disguised salary’ and is not linked to the overall profits of the LLP.

• Condition B: The member does not have ‘significant influence’ over the affairs of the LLP.

• Condition C: The member's capital contribution is less than 25% of their disguised salary.

The BlueCrest case focused particularly on Condition B.

What counts as ‘significant influence’?

The Supreme Court confirmed that significant influence must arise from the legally enforceable rights and duties contained within the LLP's arrangements.

It does not necessarily require control of the business. However, the influence must have genuine commercial substance and relate to the affairs of the LLP as a whole.

For example, having a meaningful role in high-level management or strategic decisions could potentially demonstrate significant influence. Day-to-day operational responsibility for only part of the business is less likely to qualify.

The Court also confirmed that strong performance or having considerable informal influence within an organisation is not enough on its own.

Should LLPs review their arrangements?

The judgment provides an important reminder that an individual's actual role within a business may not be enough to determine their tax status. The rights formally provided through the LLP agreement and governance structure can be crucial.

LLPs should therefore consider reviewing their partnership agreements, governance arrangements and members' tax positions to ensure they remain compliant with the salaried member rules.

If you are unsure whether your LLP structure or partnership agreements could be affected, contact SJC, Chartered Accountants. Our team would be happy to help you review your position.