The question of whether partners of a limited liability partnership ('LLP') should be treated as employees for Income Tax and National Insurance contribution purposes has been long debated.

  The conditions required for them to be taxed as employees are:

  • If it is reasonable to expect that at least 80% of the total amount payable by the LLP to the partner will be disguised salary so that it is fixed; or variable but not by reference to the overall profits or losses of the LLP; or not in practice affected by the overall amount of those profits or losses. 
  • The partner does not have significant influence over the affairs of the partnership.
  • The partner's capital contribution to the partnership is less than 25% of the total disguised salary which it is reasonable to expect will be payable by the LLP to the member.

In a case considering these rules, the First-tier Tribunal made an interesting distinction between financial and non-financial influence under head 2, so that a portfolio manager of a hedge fund did not meet the second condition (and so was taxed as a partner), but back office members of the fund manager did and so were taxed as employees. 

The key was that portfolio managers were found to have significant influence over the financial affairs of the partnership, and their discretionary allocation calculated by reference to the profit of their individual portfolio. The influence exercised did not have to be over the whole of the organisation and could just be over a specific area, in this case investment activities. In comparison, although the back office members had managerial influence, it was not directly connected to the profits of the firm. 

 If the decision is followed more widely, financial influence will therefore be key.