UK: Private Client Review For October 2023

Speed read

This month, we comment on the BlueCrest salaried members case, with the Upper Tribunal's decision offering reassurance to LLP members who have significant autonomy in managing aspects of their business. Three further victories for HMRC in relation to SDLT (Kozlowski, Espalier Ventures and Henderson Acquisitions Ltd) serve as a reminder that any taxpayer claims for lower rates will be scrutinised very carefully. Three recent taxpayer wins (in Magic Carpets (Commercial) Ltd, Gopaul and Derrida Holdings Ltd) illustrate the importance of causation and procedure in the context of penalties. Finally, we look at the IFS' recent report on inheritance tax and consider the possibility of future reforms.

BlueCrest: salaried member rules

The Upper Tribunal (UT) has dismissed HMRC's appeal and the taxpayer's cross-appeal in the BlueCrest salaried members case (HMRC v BlueCrest Capital Management (UK) LLP [2023] UKUT 232 (TC)). The decision will be of particular interest to LLP members in the investment management industry, but is also relevant in any other business where individual LLP members have significant independent responsibility.

The salaried member rules are intended to ensure that individuals cannot escape employment income taxes where their working arrangement is effectively one of employment simply by becoming an LLP member instead of an employee. The rules treat an LLP member as an employee for tax purposes if all of three conditions (A, B and C) are met. Condition C relates to capital contributions to the LLP and was not considered in BlueCrest.

Condition A: Condition A is that it is reasonable to expect that at least 80% of the amount to be paid to the taxpayer by the LLP over the period is 'disguised salary'. Here, disguised salary can include all remuneration where any variation in the amount paid is not substantially affected by the overall profitability of the LLP.

In BlueCrest, bonuses for portfolio managers were based on the performance of the portfolios they managed, and not the overall profitability of the LLP. These were paid subject to sufficient profits being available.

The UT agreed with the First-tier Tribunal (FTT) that these bonuses were disguised salary: to avoid disguised salary status, it is not necessary for individual remuneration to 'track' LLP profits; however, the link between remuneration and LLP profits must be stronger than the inevitable link between the profits of the LLP and the size of the pool available for distribution to all members.

Condition B: Condition B is that the rights and duties of the LLP members do not give the taxpayer 'significant influence' over the affairs of the LLP.

HMRC's approach in recent years, and reflected in their arguments in this case, has been to treat only those LLP members with an important central management role (e.g. executive committee members) as having significant influence.

However, the UT followed the FTT in categorically rejecting this approach, finding that significant influence is not limited to managerial influence, but could include significant influence over any of the activities of the LLP. Here, the portfolio managers had significant influence over how the LLP managed their particular portfolio, which was the core activity of the business, notwithstanding that they might not have had influence over the entire business.

The BlueCrest decision is encouraging for LLP members with significant autonomy in managing aspects of their business, even where their remuneration is not closely linked to the LLP profits

The UT decision restates that any Condition B analysis will be entirely fact dependent, so other LLPs cannot necessarily rely on the decision without a thorough analysis of the workings of the LLP in question. That said, this decision may be helpful in determining how their own facts should be interpreted, so it is encouraging for LLP members with significant autonomy in managing aspects of their business, even where their remuneration is not closely linked to the LLP profits.

SDLT: continued success for HMRC

HMRC have been successful in several recent cases on the application of non-residential rates of SDLT.

In Kozlowski v HMRC [2023] UKFTT 711 (TC), the taxpayer purchased a property which included a garage. On the day of completion, he let the garage out for £50 per month to a company in which he owned a minority stake, using a lease agreement prepared by his SDLT advisers. The lease provided for a tenancy which could be terminated at any time and did not confer exclusive possession of the garage. He then claimed an SDLT refund on the basis that mixed-use SDLT rates should have applied.

The FTT found that although the legislation refers to the 'date of completion', the point in time at which to apply the mixed-use test is the moment of completion, and not the end of the day. Accordingly, adding a non-residential use only after purchasing the land is not sufficient to attract mixed use SDLT.

It also found that the lease was not a genuine commercial arrangement and therefore the land was not mixed use in any event. This is an interesting contrast with the decision in Suterwalla, discussed in our July column, where a grazing lease over a paddock (granted on the completion date) was found to be sufficiently commercial to make the associated property mixed use for SDLT purposes.

In Espalier Ventures v HMRC [2023] UKFTT 725 (TC), the taxpayer simultaneously acquired a leasehold flat, a share of the freehold in the associated building, and three garages detached from but very close to the building. The garages had separate legal title and had been intermittently used by third parties, but planning permission had been sought to integrate the garages into the living space. The FTT found that the intention was to occupy the garages 'with' the dwelling, such that their purchase was part of a wider acquisition of a single residential dwelling for SDLT purposes, and so mixed-use rates could not apply.

In Henderson Acquisitions Ltd v HMRC [2023] UKFTT 739 (TC), the taxpayer purchased a house, intending to renovate and sell it on. Following the purchase, part of a ceiling collapsed, which limited safe access to about half of the house. The electrics and heating were also not up to modern regulatory standards. The taxpayer, through an SDLT refund business, claimed an SDLT refund on the basis that the property was non-residential. The FTT found that the relevant question was suitability for use as a dwelling and not readiness for immediate habitation. A house would need either to lack the facilities for living (e.g. washing and cooking) or be wholly (not just partially) structurally unsound in order to qualify for non-residential SDLT. Accordingly, the taxpayer failed to secure their refund.

These cases are illustrative of HMRC's continued winning streak in SDLT cases, and serve as a reminder that claims for lower rates will be scrutinised carefully.

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Originally Published by TAXJOURNAL

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