Hedge funds and consultancies to overhaul structures after landmark tax ruling
Limited liability partnerships negotiate with HMRC after BlueCrest’s £200mn Supreme Court loss
Law firms, consultancies and hedge funds are restructuring their partnerships and negotiating with HM Revenue & Customs to avoid being hit with major tax bills following BlueCrest Capital’s £200mn Supreme Court defeat.
The UK tax authority is probing a number of City firms over their arrangements, according to people familiar with the matter, with some drawing up plans to change partners’ rights and obligations in order to avoid lengthy investigations and hefty backdated tax bills.
Tax lawyers told the FT that limited liability partnerships, including hedge funds and consultancies, had hired advisers to establish whether they were falling foul of rules that govern the taxation of members’ pay. Firms were looking at measures including giving partners more influence or, in rare cases, removing them from the partnership for tax purposes, they said.
The moves follow BlueCrest’s defeat at the Supreme Court this year, when judges unanimously dismissed the hedge fund’s appeal against HMRC’s attempt to tax dozens of its partners as employees and recover some £200mn.
The ruling set an important precedent for the interpretation of regulations governing LLPs — specifically whether members are partners or employees for tax purposes — and triggered concern among groups from small hedge funds to large law firms.
HMRC has now picked up a number of cases it had put on hold while the courts considered BlueCrest’s case. Advisers to some of those businesses said HMRC inquiries on the matter had “spiked”, with firms seeking to correct the tax status of employees and settle with HMRC over historic positions.
One person advising several LLPs subject to HMRC probes said: “Firms will be settling with HMRC on how the [rules] apply to their members, rather than going to court over this.”
The majority of Britain’s professional services firms are LLPs, whose partners share in their profits. Partnerships do not have to pay employer national insurance contributions for those self-employed individuals, but taxes are due if members are actually employees under rules introduced in 2014.
The so-called salaried members’ rules were designed to prevent partnerships from disguising employees as self-employed partners to avoid tax.
The UK tax authority uses three tests to determine whether a partner is really an employee for tax purposes: the extent to which their remuneration is correlated to firm profits, how much sway they have over its operations and the level of capital they have invested.
In the BlueCrest case, which hinged on how much genuine influence some 80 to 100 members had over the business, the Supreme Court sided with HMRC’s argument that apart from four individuals, they should all be treated as employees for tax purposes.
Advisers said firms were now changing their partnership structures to comply following the BlueCrest judgment, including by preparing to give partners greater influence over the business or asking them to stump up more capital.
They added that in rare cases, firms might choose to remove individuals likely to fall foul of HMRC’s tests from the partnership and put them on the payroll as employees instead. In that case, the individual would remain a partner for external purposes but would lose their profit shares.
Sue Robinson at Ryan Tax said that was “the exception”, adding: “Most LLPs would rather not tell someone they’re being removed from the partnership, so instead they’re just making it harder for them to join.” Another tax lawyer agreed that promotion into the partnership could become harder as a result of the ruling.
Firms whose members are determined to have fallen foul of the rules will be liable for six previous years of national insurance contributions — the statute of limitations for most tax recovery — but can restructure to prevent incurring similar taxes in future.
William Wastie, head of professional services at law firm Addleshaw Goddard, said: “In the wake of the BlueCrest judgment all firms will be examining the contractual settlement that they have reached with their members.
“That will mean reviewing their arrangements to make sure that they will comfortably be able to fail one of the three conditions set out under the Salaried Member legislation.”