Supreme Court Rules on 'Salaried Members' LLP Tax Case

The Supreme Court has upheld a decision of the Court of Appeal in a case concerning how the test of whether members of a limited liability partnership (LLP) have significant influence over its affairs for the purpose of determining whether they are 'salaried members' is to be interpreted.

The Finance Act 2014 introduced changes designed to counter the use of LLPs to disguise employment and avoid employment taxes. Members of LLPs are deemed to be employees for the purposes of Income Tax and National Insurance Contributions if three conditions are all met. One of those conditions, contained in Section 863C of the Income Tax (Trading and Other Income) Act 2005, is that the mutual rights and duties of the members of the LLP, and of the LLP and its members, do not give the member significant influence over the affairs of the LLP.

In respect of an LLP that provided fund management services, HM Revenue and Customs (HMRC) took the view that, with the exception of four members who formed the executive committee, its members were salaried members. The LLP appealed to the First-tier Tribunal (FTT), which allowed the appeal in respect of members who managed portfolios of $100 million or more and those who oversaw teams of portfolio managers, on the basis that those members exercised significant influence over the affairs of the LLP. The FTT accepted that the influence referred to in Section 863C was not limited to managerial influence and need not be over every aspect of the LLP's affairs. HMRC's appeal against that decision was dismissed by the Upper Tribunal (UT).

Ruling on HMRC's further appeal, the Court of Appeal noted that Section 863C, read literally, requires that the influence must be given by the mutual rights and duties of the members, and of the LLP and its members. In the Court's judgment, the wording of Section 863C was clear and unambiguous, and it was a rational legislative purpose that the influence over the LLP's affairs should be grounded in its legally binding constitutional framework, in this case the LLP agreement. The FTT and the UT had erred in law in accepting a wider construction. The case was remitted to the FTT for reconsideration in the light of the correct construction of Section 863C.

Dismissing the LLP's appeal against that decision, the Supreme Court considered that it was consistent with the purpose of the legislation that the type of influence that should qualify was influence founded in the legally binding constitutional framework of the LLP. The FTT had approached the application of Section 863C on the mistaken basis that the necessary influence could be found in de facto arrangements, however informal and whether or not legally enforceable. That had been a material error of law, and the Court of Appeal had been right to hold that the case should be remitted to the FTT.