Key Takeaways
- • BlueCrest Capital's £200mn Supreme Court defeat against HMRC has prompted UK law firms, consultancies and hedge funds to restructure their partnerships to avoid tax bills under the salaried members rules.
- • HMRC is probing a number of City firms over their LLP arrangements, according to people familiar with the matter cited by the Financial Times, and has resumed cases it had paused pending the BlueCrest ruling.
- • Firms are changing partner rights by giving members more influence or capital obligations, and in rare cases moving individuals onto payroll as employees while keeping them as external partners.
- • Firms found to have breached the rules face liability for six years of national insurance contributions, the statute of limitations for most tax recovery.
Summary
Law firms, consultancies and hedge funds are restructuring their limited liability partnerships and negotiating with HM Revenue & Customs to avoid major tax bills following the Supreme Court's unanimous decision against BlueCrest Capital, according to the Financial Times. The court dismissed the hedge fund's appeal against HMRC's attempt to treat dozens of its partners as employees for tax purposes and recover some £200mn. The ruling set a significant precedent on whether LLP members are partners or employees under the salaried members rules introduced in 2014, and it has caused concern across firms ranging from small hedge funds to large law firms.
The FT reports that HMRC is probing a number of City firms, according to people familiar with the matter, and has picked up cases it had held in abeyance while the courts considered BlueCrest. Advisers said HMRC inquiries on the issue had "spiked", with firms seeking to correct the tax status of employees and settle historic positions. One adviser to several LLPs under investigation said firms would settle with HMRC on how the rules apply to their members rather than litigate.
The UK tax authority applies three tests to determine whether a partner is effectively an employee: the extent to which remuneration correlates with firm profits, the degree of influence over operations, and the level of capital invested. In BlueCrest, which turned on the genuine influence of roughly 80 to 100 members, the Supreme Court agreed with HMRC that all but four should be treated as employees.
In response, firms are preparing to give partners greater influence or ask them to contribute more capital. In rare cases, firms may remove individuals likely to fail HMRC's tests from the partnership for tax purposes and place them on the payroll, leaving them as external partners but without profit shares. Sue Robinson at Ryan Tax described this as "the exception", noting that most LLPs would rather not remove partners and would instead make promotion harder. Firms found to have breached the rules will be liable for six previous years of national insurance contributions. William Wastie, head of professional services at Addleshaw Goddard, said all firms would review their member arrangements to ensure they can comfortably fail one of the three salaried member conditions.
The FT reports that HMRC is probing a number of City firms, according to people familiar with the matter, and has picked up cases it had held in abeyance while the courts considered BlueCrest. Advisers said HMRC inquiries on the issue had "spiked", with firms seeking to correct the tax status of employees and settle historic positions. One adviser to several LLPs under investigation said firms would settle with HMRC on how the rules apply to their members rather than litigate.
The UK tax authority applies three tests to determine whether a partner is effectively an employee: the extent to which remuneration correlates with firm profits, the degree of influence over operations, and the level of capital invested. In BlueCrest, which turned on the genuine influence of roughly 80 to 100 members, the Supreme Court agreed with HMRC that all but four should be treated as employees.
In response, firms are preparing to give partners greater influence or ask them to contribute more capital. In rare cases, firms may remove individuals likely to fail HMRC's tests from the partnership for tax purposes and place them on the payroll, leaving them as external partners but without profit shares. Sue Robinson at Ryan Tax described this as "the exception", noting that most LLPs would rather not remove partners and would instead make promotion harder. Firms found to have breached the rules will be liable for six previous years of national insurance contributions. William Wastie, head of professional services at Addleshaw Goddard, said all firms would review their member arrangements to ensure they can comfortably fail one of the three salaried member conditions.
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