Due to various developments, structures introduced in the UK more than two decades ago are attracting the attentions of the tax authorities. This article delves into the details.

The following article examines how Limited Liability Partners, introduced in the UK some 20 years ago, are starting to draw unfriendly attention from the tax authority for a variety of reasons. LLPs have been a structure in use and familiar to wealth managers for a considerable period of time. Therefore, any changes or pressures need to be well understood. 

Examining the topic are Nick Bustin, employment tax director, and Dinesh Pancholi, senior manager at Haysmacintyre, the chartered accountants and advisory firm. The editors at this news service are pleased to share these views and invite responses. To join the debate, email tom.burroughes@wealthbriefing.com

Limited Liability Partnerships (LLPs) were introduced in 2000, as a way for firms to combine having a limited liability status with an added layer of flexibility. LLPs became hugely popular with owner-managed professional services firms, such as accountants, lawyers and asset managers, placing greater emphasis concerning the classification of partners as self-employed.

 HMRC grew uneasy that certain individual members were providing services akin to employees (disguised employees), thereby avoiding Class 1 National Insurance (“NI”) and in April 2014, the Salaried Members Rules (SMR) were introduced.

The recent First Tier Tribunal (“FTT”) judgment in BlueCrest Capital Management (UK) LLP v HMRC released on 29 June 2022 has brought the issue to the forefront, especially given the level of additional liabilities at stake (approximately £55 million ($61.62 million)). The FTT decision is prompting businesses to go back to the drawing board and check that they are compliant with the rules. It should be noted that FTT decisions are not binding and that either BlueCrest or HMRC, or both, may seek leave to appeal the decision to the Upper Tier Tribunal.

So, what does this mean for wealth management firms set up as LLPs, and how can they ensure full compliance with the rules?

What is HMRC expected to do?
Although HMRC has been undertaking reviews to enforce the legislation via issuing notices of enquiry, nudge letters and checking partnership tax returns, the BlueCrest case will mean increased HMRC compliance activity.

With £55 million of employer NI at stake, only time will tell which way the wind will blow and either party may appeal. The decision will, however, impact huge numbers of firms in the asset management industry, particularly those who rely on their members failing the set conditions. As such, it is vital for all wealth managers set up as LLPs to revisit their policies to ensure that all members are operating in line with the rules. 

What are the rules in question?
The SMR were introduced by HMRC in April 2014, to give firms operating as LLPs more structure as to how their members should be taxed. Under the rules, an LLP member is treated as an employee for tax purposes if all of the following conditions are met: 

-- If at the relevant time it is reasonable to expect that at least 80 per cent of the total amount payable by the LLP for the individual’s services in individual’s capacity as a member of the LLP will be “Disguised Salary.’’ This includes payments which are either fixed, variable but without reference to the overall profit or loss or are not in practice affected by the overall amount of profits or losses of the LLP; 
-- The mutual rights and duties of the individual do not have significant influence over the affairs of the LLP; and 
-- The individual’s capital contribution is less than 25 per cent of the amount of the disguised salary it is reasonable to expect the member to receive. 

In essence, these rules are there to ensure that only ‘proper’ members of an LLP receive the benefit of the corresponding tax treatment. 

What do LLPs need to do now? 
HMRC are already reviewing LLPs to ensure that they are being compliant with the SMR and the BlueCrest case will only increase their compliance activity. This will involve wealth managers revisiting their compliance measures. Just because firms were once compliant doesn’t mean that they will always be, and continual review and updates of policy will be useful to the firms in question, to ensure long-term compliance. 

As a starting point, LLPs that have received adverse communication from HMRC should consider their position both historically and going forward. For LLPs who are relying on failing to meet the first condition, should ensure that any bonuses or performance share varies with overall LLPs profit and losses. 

As a baseline, all LLPs (regardless of any adverse decisions from HMRC) should urgently review their LLP structure in light of the judgment and should be able to demonstrate how members do not meet each of the listed conditions. Not only this, but it is important for these structures to be continually revisited. A good way to do this is to use key trigger points, such as year-end, recruitment, promotion, retirement, new teams and business lines as prompts to review compliance and ensure that the conditions are still not met following any internal changes. 

While LLPs are an attractive option for many, firms must ensure that they do not become complacent with their compliance. Continual review and honest appraisal are important, or they risk action from HMRC down the line.