The Commissioners for HM Revenue and Customs v Bluecrest Capital Management (UK) LLP

Hearing dates: 26and 27 November 2024

(Further written submissions on 4 and 11 December 2024)

Approved Judgment

This judgment was handed down remotely at 2pm on 17 th January 2025 by circulation to the parties or their representatives by e-mail and by release to the National Archives.

Introduction

This second appeal and cross-appeal from the decision of the Tax and Chancery Chamber of the Upper Tribunal (Edwin Johnson J and Judge Jennifer Dean) dated 18 September 2023 (“the UT Decision”) raise issues about the correct interpretation and application to the facts of the “salaried members” legislation first enacted in the Finance Act 2014 (“FA 2014”) to counter the perceived avoidance of the usual charges to income tax and national insurance contributions (“NICs”) on “disguised salary” paid to certain members of limited liability partnerships (“LLPs”). The relevant legislation is contained in sections 863A to 863G of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”), as inserted by section 74 of, and Schedule 17 to, FA 2014.

LLPs were a form of legal entity unknown to English law until the enactment of the Limited Liability Partnerships Act 2000 (“ LLPA 2000”). Section 1 of LLPA 2000 provided that:

“(1) There shall be a new form of legal entity to be known as a limited liability partnership.

(2) A limited liability partnership is a body corporate (with legal personality separate from that of its members) which is formed by being incorporated under this Act; …”

Despite the separate corporate identity of LLPs, however, their treatment for the purposes of income tax and NICs was assimilated with that of traditional partnerships formed under the Partnership Act 1890, which in England and Wales (although not in Scotland) have always lacked any form of corporate identity. For income tax, this assimilation was effected in comprehensive terms by ITTOIA section 863 which provides that:

“(1) For income tax purposes, if a limited liability partnership carries on a trade, profession or business with a view to profit –

(a) all the activities of the [ LLP] are treated as carried on in partnership by its members (and not by the [ LLP] as such),

(b) anything done by, to or in relation to the [ LLP] for the purposes of, or in connection with, any of its activities is treated as done by, to or in relation to the members as partners, and

(c) the property of the [ LLP] is treated as held by the members as partnership property.

References in this subsection to the activities of the [ LLP] are to anything that it does, whether or not in the course of carrying on a trade, profession or business with a view to profit.”

There are corresponding provisions for NIC purposes, which I need not recite.

One consequence of this deeming is that members of an LLP are generally treated for income tax and NIC purposes as self-employed, in the same way as members of a traditional, non-corporate partnership. In broad terms, the reasons for this treatment are that a partnership is a relationship of joint venture, where each partner is an agent for the others and jointly liable for the liabilities of the partnership, whereas those features are absent from an employment relationship, where an element of service and control is typically present: see the observations of Elias LJ, giving the leading judgment in the Court of Appeal with which Stephen Richards and Lloyd LJJ agreed, in Bates van Winkelhof v Clyde & Co LLP [2012] EWCA Civ 1207, [2013] 1 All ER 844, at [64] and [65]. The issue in that case was whether a partner in a firm of solicitors was a “worker” for the purposes of the Employment Rights Act 1996, on which the Supreme Court took a different view from the Court of Appeal: see [2014] UKSC 32, [2014] 1 WLR 2047. But I do not understand there to be any dispute about the basic validity of the points made by Elias LJ when he said ( ibid):

“The very concept of employment presupposes as a matter of sociological fact a hierarchical relationship whereby the worker is to some extent at least subordinate to the employer. This is the characteristic which underpins the general understanding of what constitutes the essence of an employment relationship. Where the relationship is one of partners in a joint venture, that characteristic is absent.

…

It is true that the contractual arrangements between the parties may, and typically do, confer different powers on different groups of partners. But the essential nature of the relationship with each partner acting as an agent for, and being responsible for the acts of other partners places them outside the sphere of employment relations entirely.”

Against this background, on 20 May 2013 the Government published a consultation document entitled “Partnerships: A review of two aspects of the tax rules”. One of those aspects was identified in para 1.2, by reference to an announcement made in the 2013 Budget, as “removing the presumption of self-employment for some LLP members, to tackle the disguising of employment relationships through LLPs.” The other “aspect” of the tax rules is, for present purposes, irrelevant. In his Foreword, Mr David Gauke MP, the Exchequer Secretary to the Treasury, said:

“The Government recognises that LLPs are an important and legitimate commercial structure and that the majority of LLPs operate in a way that does not disguise employment relationships. However, there is currently an unintended inconsistency in the way that LLPs and general partnerships are treated that means that some LLPs are able to avoid their employment tax obligations. This strand of the review will level the playing field in the tax treatment of all partnerships, ensuring that employment taxes are paid for LLP members who should properly be counted as employees.”

Under the heading “Salaried members of LLPs”, the consultation document then explained:

“1.7 Current tax rules mean that individuals who are members of an LLP are taxed as if they are partners in a partnership established under the Partnership Act 1890 (traditional partnership) even if they are engaged on terms closer to those of employees.

1.8 This produces unfairness in the tax system as an individual member of an LLP receives more favourable treatment of income tax and National Insurance Contributions (“employment taxes”) than an individual who is an employee engaged on similar terms. As a result, LLPs can be used to disguise employment and to avoid employment taxes. There is evidence that LLPs are increasingly being used and marketed on that basis.

…

1.10 To preserve fairness and prevent avoidance through LLPs, the Government will make changes to employment taxes rules to:

(a) remove the presumption that all individual LLP members are treated as partners and hence self-employed for tax purposes; and

(b) set out the factors which will be taken into account in deciding whether an individual member of an LLP should be treated as an employee for the purposes of employment taxes.”

In the ensuing discussion of “Disguised Employment”, the document then said:

“2.7 The LLP is a unique entity as it combines limited liability for its members with the tax treatment of a traditional partnership. However, individual members of an LLP are taxed as if they are partners even if their membership terms are such that an individual would normally be regarded as being in an employer-employee relationship. For example, members will be taxed as partners even if they have fixed salaries, are not exposed to risk, take no substantive role in the management of the business and have no right to profits or assets if the partnership ends.”

Paragraph 2.8 proposed to achieve this objective by providing that an individual member who met either of two conditions would be classed as a “salaried member” and, in that capacity, would be liable to income tax and primary class 1 NICs as an employee; the LLP would become the secondary contributor and be liable to pay secondary NICs. The two conditions, which differ significantly from those subsequently enacted, were then set out. In short, the first condition was that the individual member would be a “salaried member” if he or she would be regarded as employed by the partnership under the general law of employment. The second condition, if the first was not met, was that the individual would also be treated as a “salaried member” if (a) he or she had no economic risk in the form of loss of capital or repayment of drawings if the LLP made a loss or was wound up, (b) was not entitled to a share of profits, and (c) was not entitled to a share of any surplus assets on a winding-up.

On 10 December 2013, HMRC published a Summary of Responses to the consultation. The executive summary at the beginning of this document acknowledged that, while there was general support for the proposal to prevent the avoidance of employment taxes through disguised employment relationships, a “large number” of the respondents objected to the use of traditional employment law...