Peter Wilson v The Commissioners for HMRC

This is an appeal against a decision of the First-tier Tribunal (“the FTT”) released on 20 May 2020 (“the Decision”). The FTT dismissed an appeal by the appellant (“Mr Wilson”) against a decision of the respondents (“HMRC”) dated 21 March 2018 that he was a self-employed earner for national insurance purposes in the period 31 October 2012 to 31 March 2014. The decision of HMRC was made pursuant to s 8 Social Security Contributions (Transfer of Functions etc) Act 1999 and had the result that Mr Wilson was liable to Class 2 and Class 4 national insurance contributions.

Mr Wilson is a chartered accountant and an international tax specialist. He was engaged, to use a neutral term, by Haines Watts London LLP in November 2011. Haines Watts are an international firm of chartered accountants and Mr Wilson was engaged with a view to developing a separate international tax department within the London Office of the UK firm. Haines Watts London LLP (“Haines Watts” or “the LLP” as appropriate) operates as a limited liability partnership. We set out below the FTT’s findings of fact as to the circumstances in which Mr Wilson came to be engaged by Haines Watts. For present purposes we note that on 1 November 2011 various documents were signed by Mr Wilson in connection with his engagement with Haines Watts:

It is not clear why HMRC’s decision did not cover the period from 1 November 2011 to 31 October 2012, but nothing turns on that for the purposes of this appeal.

We shall consider the legislative framework governing liability to national insurance contributions (“NICs”) in detail below. For present purposes, we note that where a person is a self employed earner, that person is liable to Class 2 contributions. Liability to Class 4 contributions depends on whether the person is liable to income tax on the profits of a trade, profession or vocation. Where income tax is charged on a member of an LLP in respect of the LLP’s profits of a trade or profession, Class 4 contributions are payable by the member if they would be payable were the trade or profession carried on in partnership by the members.

The income tax liability of partners is dealt with by Part 9 Income Tax (Trading and Other Income) Act 2005 (“ITTOIA 2005”), which the FTT referred to as “the Partnership Code”. Section 863 ITTOIA 2005 makes provision for the application of the Partnership Code to LLPs carrying on a trade, profession or business with a view to profit.

The issues before the FTT required it to consider the effect of s 4(4) Limited Liability Partnerships Act 2000 (“LLPA 2000”) which concerns the question of whether a member of an LLP can also be employed by the LLP. There are a number of authorities in the context of employment law which consider the effect of s 4(4) LLPA 2000, including the Court of Appeal decision in Tiffin v Lester Aldridge [2012] EWCA Civ 35 and the Supreme Court decision in Clyde & Co LLP v Bates van Winklehof [2014] UKSC 32. We consider these authorities in detail below. In short, Mr Wilson’s case before the FTT was that he was in substance an employee of Haines Watts and not liable to Class 4 NICs.

There is an issue as to exactly what the FTT decided in some respects. The FTT summarised its conclusions at [181] of the Decision as follows:

The FTT went on to consider and give reasons for each of these conclusions under the following headings: Tax treatment set out in Section 863 ITTOI at [182] – [188]; Ability to be an employee of and member of an LLP at [189] – [203]; and Payments made to Mr Wilson as a member in any event at [204] – [212]. On the basis of those findings the FTT held that HMRC was right to decide that Mr Wilson was a self-employed earner in the relevant period, and liable to NICs. The appeal was therefore dismissed.

The Upper Tribunal (Judge Herrington) granted permission to appeal on grounds which may be summarised as follows, by reference to the FTT’s findings at [181]:

We shall address these grounds of appeal as “Ground 1”, “Ground 2” and “Ground 3” respectively. It is necessary for Mr Wilson to establish errors of law pursuant to all three grounds of appeal if we are to set aside the decision of the FTT. HMRC have served a notice pursuant to Rule 24 of the Upper Tribunal Rules in which they take issue with each ground of appeal. We shall deal with the arguments raised by HMRC in our discussion of the issues below. First, we shall set out the legislative framework in more detail and describe the FTT’s findings of fact.

Amendments to the income tax and national insurance treatment of members of LLPs were made in 2014. For present purposes, we are concerned with the provisions prior to those amendments.

The Social Security Contributions and Benefits Act 1992 (“SSCBA 1992”) makes provision for categories of earners who are liable to Class 1 or Class 2 NICs as follows:

Generally, employed earners may be liable to pay Class 1 employee NICs pursuant to s 6 SSCBA 1992. A self-employed earner is not liable to pay Class 1 contributions but may be liable to pay Class 2 NICs pursuant to s11 SSCBA 1992. We understand that Class 2 contributions in 2012-13 were payable at the rate of £2.65 per week.

Section 15 SSCBA 1992 makes provision for Class 4 contributions, which are payable by reference to the profits of a trade profession or vocation chargeable to income tax. Class 4 contributions are payable in the same manner as income tax and by the person on whom income tax is or would be charged. Section 15(3A) SSCBA 1992 makes specific provision for members of an LLP:

It is notable that section 15 does not provide that liability to Class 4 contributions is by reference to the status of the individual as a self-employed earner. Class 4 contributions are payable by any person who is liable to income tax on the profits of a trade, profession or vocation.

We have previously mentioned that Section 863 ITTOIA 2005 applies the provisions of the Partnership Code to LLPs. The Partnership Code essentially provides that a partnership firm is not to be regarded for income tax purposes as a separate legal entity. Instead, the profits and losses of the firm for any tax year are allocated to the individual partners in accordance with the firm’s profit sharing arrangements, subject to certain provisions in ITTOIA 2005 concerning the allocation of profits and losses. Section 863 then provides as follows in relation to LLPs:

Mr Wilson qualified as a chartered accountant in Australia in 1975 and subsequently gained wide experience of international tax law and practice both as an employee and a partner in various firms. By 2008, together with other shareholders, he had established a company called Gateway Partners UK Limited (“GPUK”) which intended to acquire and operate London-based accounting firms. In 2011 steps were being taken to sell GPUK and the shareholders entered into negotiations with Haines Watts.

The FTT made certain findings about the negotiations with Haines Watts. The result of those negotiations was an agreement between Mr Wilson and Mr Matthew Perry, who was the managing member of Haines Watts. Mr Wilson was to concentrate on developing an international tax department without the burden of any general practice management. Haines Watts was to take over the relationships with accounting clients of GPUK. At [29] the FTT found as follows:

The negotiations led to GPUK being sold to another limited company, which licensed the use of GPUK’s goodwill to Haines Watts. The sale took place on 1 November 2011 and at the same time Mr Wilson entered into the LLP Agreement, the Deed of Variation and the Side Letter. The FTT found that the drafting of those documents reflected the parties’ intentions.

It will be necessary for us to consider the terms of the LLP Agreement and the Deed of Variation in some detail in due course. The FTT included in the Decision a detailed summary of those documents and we shall refer to specific terms as necessary.

The members of the LLP were divided into “Client Members” and “Management Members”. There were four Client Members, including Mr Wilson, and three Management Members, including Mr Perry. Mr Perry was also defined as the “Managing Member”.

Client Members were required to devote the whole of their time and attention to client matters and the day-to-day management of the LLP business as requested by the Management Members and to use their best endeavours to further the interests of the LLP Business and promote all aspects of the LLP Business.

Management Members were responsible, together with the Managing Member, for establishing the detailed local commercial strategy of the LLP. The Managing Member was answerable to the members for the effective day-to-day management of the LLP business, consistent with policies and strategy established with the Management Members.

The Deed of Variation was entered into by Mr Wilson, defined as “the Fixed Income Member”, and the Management Members. It made certain variations to the LLP Agreement. It defined “Fixed Income Member” as a Member who had executed the Deed of Variation and added a new clause 3.5 to the LLP Agreement which provided as follows:

The Deed of Variation also provided as follows:

It can be seen that the new clause 3.5 inserted by the Deed of Variation removed certain voting rights Mr Wilson would otherwise have had as a member of the LLP. It also provided for more limited access to financial information and made provision for an indemnity to Mr Wilson and other Fixed Income Members by the Client Members and Management Members.

Clause 2.1.3 of the Deed of Variation removed certain rights and obligations Mr Wilson would otherwise have had as a member. Clause 3 made provision for Mr Wilson’s remuneration under the heading “profit share”.

Before the FTT, Mr Wilson contended that he was not a Client Member of the LLP. In support of that argument he relied on the terms of the indemnity inserted as clause 3.5.3 of the LLP Agreement which he said would otherwise involve Mr Wilson as a Client Member indemnifying himself as a Fixed Income Member. The FTT observed that the clause was poorly drafted but at [48] rejected Mr Wilson’s contention that he was not a Client Member:

There is no challenge on this appeal to the FTT’s finding that Mr Wilson was a Member, a Client Member and a Fixed Income Member for the purposes of the LLP Agreement.

The FTT outlined at [50] and [51] the various voting entitlements under the LLP Agreement. It summarised those matters where voting rights were removed from Mr Wilson by the Deed of Variation and those matters where Mr Wilson retained voting rights. We can set them out as follows:

The FTT also noted certain provisions of the LLP Agreement dealing with rights and obligations of Mr Wilson in connection with the following matters:

The FTT noted that the following provisions of the LLP Agreement did not apply to Mr Wilson as a result of the Deed of Variation:

The FTT considered the provisions of the LLP Agreement and the Deed of Variation relevant to the allocation of profits and Mr Wilson’s remuneration. It found on the basis of those provisions that Mr Wilson was entitled by way of First Charge to annual sums which included an amount of £180,000, reduced by some amount if his chargeable time was less than £400,000, and 25 % of the profits from the International Tax Practice. The First Charge was only payable out of the profits of Haines Watts. If there were insufficient profits to pay all the First Charges, the effect of the Deed of Variation was that Mr Wilson’s entitlement was not scaled back. However, the FTT found that if Haines Watts had made a loss overall then Mr Wilson was not entitled to any payment by way of his First Charge.

The FTT acknowledged that the LLP Agreement provision dealing with the sharing of net losses amongst Members did not apply to Mr Wilson, but that did not alter its conclusion that Mr Wilson was not entitled to payment if Haines Watts made losses in any accounting year.

The Side Letter provided as follows:

The value of Mr Wilson’s interest in the International Tax Practice was to be calculated by reference to 4x the average net profit of the International Tax Practice allowing for the allocation of overheads and less the annual compensation of an individual to carry on that practice on Mr Wilson ceasing to do so.

The FTT considered that the provision in relation to purchasing Mr Wilsons interest in the International Tax Practice was consistent with membership of the LLP rather than employment by the LLP.

The FTT also made various findings at [76] – [91] under the heading “Other relevant findings” as to how Mr Wilson and the LLP conducted themselves after 1 November 2011 and concluded at [91] as follows:

The reference to “hollow out” was a reference to the way in which Mr Wilson’s case had been put to the FTT. Essentially, it was Mr Wilson’s case that he was in substance an employee of the LLP and a member in name only.

The FTT then made findings of fact as to the basis on which Mr Wilson completed his self-assessment returns for tax years 2011-12 to 2013-14. In particular, for years 2011-12 and 2012-13 he declared his income from Haines Watts as a share of partnership profits, but in 2013-14 he declared such income as employment income. The FTT records that Haines Watts paid the income tax and NICs due on Mr Wilson’s income from Haines Watts for 2011-12 and payments on account for 2012-13.

Mr Wilson left Haines Watts on 31 March 2014, although there was a dispute about his exit arrangements. This included a dispute as to who had the liability to pay tax due.

The decision under appeal before the FTT was a decision of HMRC dated 21 March 2018 that Mr Wilson “was self employed in respect of his engagement with Haines Watts LLP for the period from 31 October 2012 to 31 March 2014”. It was common ground that this was a decision pursuant to s 8 Social Security Contributions (Transfer of Functions etc) Act 1999 (“SSCA 1999”) which provides as follows:

The appeal rights in relation to decisions under s8 SSCA 1999 are contained in s11 of the same Act.

We understand from the parties’ arguments in this case that the real issue between the parties concerns Mr Wilson’s liability to Class 4 contributions. Hence we were referred, and the FTT was referred, to s15(3A) SSCBA 1992 as being the test for liability to Class 4 contributions. Further, Ms Murray in her skeleton argument put her overall submission in terms that Mr Wilson was an employee of Haines Watts and therefore an employed earner rather than a self employed earner, with the result that he was not liable to Class 4 contributions pursuant to s15(3A).

We were not taken to the provisions which govern Class 2 contributions or the distinction in the provisions which we have described above as to the basis on which Class 2 and Class 4 contributions become payable. The point is significant to this extent: A decision under s 8 SSCA 1999 relates to the category of earner and not liability to Class 4 contributions. The matter under appeal is a decision that Mr Wilson was a self-employed earner. However, the parties appear to accept that for present purposes if Mr Wilson were a self employed earner then that would lead to liability to Class 4 contributions pursuant to s15(3A) SSCBA 1992 and vice versa. We will proceed on that basis.

Ground 1 concerns the FTT’s decision at [181(1)] that:

Mr Wilson contends that the FTT made its decision on the basis that s 863 ITTOIA 2005 deems the income of a member of an LLP to be a share of partnership profits and overrides any question of whether the individual is an employee who receives employment income under a contract of service. It is said that no argument to this effect had been relied on by HMRC.

HMRC say that this aspect of the decision must be looked at in context, in particular the context of the immediately preceding paragraph which reads as follows:

HMRC say that the FTT had already found that Mr Wilson was a member of the LLP and it had rejected Mr Wilson’s argument that his membership of the LLP was “hollowed out” and of no real substance. Once that finding had been reached, the application of s 863 ITTOIA 2005 necessarily followed.

In support of this submission, HMRC also referred us to what the FTT subsequently said in its decision refusing Mr Wilson’s application for permission to appeal on this ground:

On one view, the FTT had already reached a conclusion at [91] that Mr Wilson’s membership of the LLP had not been “hollowed out”. However, if that is the case it is difficult to understand why the Tribunal re-visited the question in the context of its third finding at [181(3)] which is the subject of Ground 3.

Looking at the Decision itself, notwithstanding what the FTT has said in refusing permission to appeal, we can see why Mr Wilson considers that the FTT did view s 863 ITTOIA 2005 as a deeming provision. In the paragraphs following [181], the FTT considered each of the three aspects of its decision. It looked at the tax treatment required by s 863 and said as follows:

It is clear to us from these paragraphs that at [181(1)] the FTT did regard the application of s 863 as a free-standing basis on which to determine the appeal. That conclusion is entirely consistent with the language used by the FTT in [181(2)] where the FTT goes on to decide in the alternative that s 4(4) LLPA 2000 has the effect that a member of an LLP cannot be treated as an employee for tax purposes. It prefaces that conclusion with the words “if, despite the wording of Section 863, there was scope for Mr Wilson to be taxed as an employee …”. It is clearly the wording of s 863 which has drawn the FTT to a conclusion that Mr Wilson as a member of the LLP was taxable as a partner in the partnership which is treated as carrying on the business of the LLP.

Having said that, for present purposes neither HMRC nor indeed the FTT in refusing permission to appeal have sought to suggest that s 863 does operate in this way. Ground 1 therefore appears to be academic. It is not sufficient for Mr Wilson to succeed on Ground 1 alone. If Mr Wilson is right as to his interpretation of the Decision then it is accepted that the FTT erred in law but he must still succeed on Grounds 2 and 3. If Mr Wilson is wrong, there is no error of law and the real issue arises under Ground 3.

In the circumstances it is not necessary for us to reach a conclusion on the substance of Ground 1 (i.e. whether s 863 ITTOIA 2005 operates as a deeming provision) and we say no more about it.

Ground 2 concerns the FTT’s finding at [181(2)] of the Decision that:

Section 4(4) LLPA 2000 provides as follows:

Mr Wilson contends that the FTT relied upon case law not cited by either party to establish that it was not bound by the construction given to s 4(4) LLPA 2000 by the Court of Appeal in Tiffin. As a result, he says that the FTT wrongly relied upon observations of Lady Hale (with whom Lord Neuberger and Lord Wilson agreed) in the Supreme Court in Clyde & Co.

Ground 2 raises a difficult question as to the effect of s 4(4) LLPA 2000 and whether in English law a member of an LLP can also be an employee of the LLP. The Court of Appeal in Tiffin answered that question in the context of a member of an LLP seeking to make a claim of unfair dismissal based on his status as an employee under the Employment Rights Act 1996.

In the course of his judgment, Rimer LJ (with whom Wall and Jackson LLJ agreed) held as follows:

A judgment of the Court of Appeal is binding on the FTT and on this tribunal as a matter of precedent. If the authorities were limited to Tiffin, then the FTT’s conclusion that s 4(4) LLPA 2000 prevents a member of an LLP from also being an employee of the LLP would be wrong as a matter of law.

In Clyde & Co the Supreme Court was concerned not with whether a member of an LLP could be an employee of the LLP, but whether a member could be a worker for employment law purposes. The FTT appears to have applied dicta of Lady Hale in Clyde & Co where, having referred to the decision of the Court of Appeal in Tiffin, she states as follows:

In reliance on these passages the FTT concluded that in English law a member of an LLP cannot also be an employee of the LLP and that Tiffin was no longer good law. It did so despite its conclusion that the dicta were not necessary for the decision of the Supreme Court and did not form part of the reasoning for that decision. It then purported to rely on a principle recently stated by Lord Burnett CJ in R v Barton and Booth [2020] EWCA Crim 575 at [104] in the context of the meaning of dishonesty. We add what was said at [103] and the whole of [104] for context:

It is clear to us that if the dicta of Lady Hale in Clyde & Co as to the meaning and effect of s 4(4) LLPA 2000 were not part of the reasoning of the Supreme Court then those dicta would not fall within the limited exception to the rule of precedent described by Burnett CJ. The FTT was therefore wrong to treat the dicta as overruling Tiffin in the way it did.

HMRC had not invited the FTT to take that approach. They had argued that the dicta of Lady Hale formed part of the reasoning of the Supreme Court and had the effect of overruling Tiffin. In contrast, Mr Wilson had argued that the dicta did not form part of the reasoning of the Supreme Court and therefore Tiffin was binding and the FTT was required to follow the reasoning of Rimer LJ in that case.

Ground 2 on the present appeal essentially involves the same arguments. They are not easy arguments. In Reinhard v Ondra LLP [2015] EWHC 26 at [44] and [45], Warren J left open the question as to whether what was said by Lady Hale formed part of the reasoning of the Supreme Court in Clyde & Co. When he returned to the question in Reinhard v Ondra LLP No 2 [2015] EWHC 1869 at [38] he stated that Lady Hale’s dicta was part of the reasoning in Clyde & Co and that the approach in Tiffin could not stand with that reasoning.

For reasons which follow, we have come to the conclusion that Mr Wilson’s appeal on Ground 3 must be dismissed. That finding determines this appeal. In those circumstances it is not necessary for us to deal with Ground 2 and in our view it would not be helpful for us to add our thoughts to the debate in a case where it is not determinative.

Ground 3 concerns the FTT’s finding at [181(3)] that:

It appears to be common ground for the purposes of Ground 3 that if Mr Wilson would be a partner in the notional partnership identified in s 4(4) LLPA 2000, then he would be a self-employed earner and liable to Class 4 contributions.

The FTT approached this aspect of the Decision on the basis that Tiffin was good law and should be applied. Mr Wilson contends that whilst the FTT accepted that labels in the LLP Agreement were not determinative of the true nature of the relationship between Mr Wilson and the LLP, in fact the FTT did rely on certain labels and failed to give effect to the substantive terms of the Deed of Variation. Essentially, Mr Wilson says that the FTT should have found that he was not in substance a partner in the activities of the LLP which by virtue of s 863 ITTOIA 2005 are treated as carried on in partnership. It ought to have found that he was in substance an employee of the LLP.

As to reliance on labels, the FTT said this:

In the context of the exercise being conducted pursuant to s 4(4) LLPA 2000 and Tiffin, it is clearly right not to place reliance on labels put on the agreements between Mr Wilson and the LLP. The exercise is only required because the written agreements constitute Mr Wilson as a member of the LLP and Mr Wilson accepts that he was a member of the LLP. His case is that notwithstanding that he was a member, he was in reality an employee of the LLP pursuant to section 4(4).

Ms Murray’s submissions under Ground 3 went beyond asserting that the FTT wrongly relied upon labels. She sought to challenge the FTT’s finding that Mr Wilson was in substance a partner and not an employee, regardless of the use of labels.

The FTT considered at [206] – [211] the approach of the Court of Appeal in Tiffin to the question of whether Mr Tiffin was a partner. It also referred to the well-known case of Stekel v Ellice [1973] 1 WLR 191, which Mr Wilson had relied on before the FTT and which was extensively referred to by the Court of Appeal in Tiffin.

By way of summary, the FTT found that whilst Mr Wilson was not required to contribute to capital and had no right to any surplus assets on a winding up, he did have a voice in the management of the affairs of the LLP and an interest in its profits. That interest was not just in the profits of the International Tax Practice but also the profits of the firm as a whole, because he was only entitled to his First Charge if Haines Watts made a profit. If it made a loss, he was not entitled to his First Charge. The FTT also relied on what it considered to be the intentions of the parties that Mr Wilson should be a member of the LLP and not an employee. It did not accept that Mr Wilson’s position as a member was in some way “hollowed out”.

Mr Wilson had given evidence before the FTT of circumstances where in practice Haines Watts exercised control over his work in relation to clients of the firm. The FTT did not consider that those practices undermined his position as a member of the LLP.

In conclusion the FTT stated at [212]:

Ms Murray criticised this conclusion as being wrong in law for the following reasons:

We shall deal with the last point first because it is clear that Mr Wilson has permission to appeal on that ground. Ms Murray criticises the FTT as having relied on the following labels in the agreements:

Megarry J in Stekel v Ellice was concerned with whether an individual described as a “salaried partner” was a partner. In relation to “labels” he said as follows:

We do not consider that the FTT relied on the labels by which Mr Wilson was described in the LLP Agreement and the Deed of Variation, as opposed to the substantive rights and obligations of the parties. It expressly recognised that labels may not determine the true nature of an agreement. Ms Murray submitted that the FTT relied on its finding that Mr Wilson was a Client Member as defined in the LLP Agreement and a Fixed Income Member as defined in the Deed of Variation. Nowhere in the Decision is there any real suggestion that the FTT’s finding that Mr Wilson was a Client Member and a Fixed Income Member played a part in its conclusion that he was a partner for the purposes of the notional partnership in s 4(4) LLPA 2000. The FTT’s reasons for concluding that Mr Wilson was a partner appear at [204] – [212] where there is no mention of Mr Wilson being a Client Member or a Fixed Income Member.

As to the labelling of Mr Wilson’s entitlement to remuneration as being by way of “First Charge”, the FTT was careful to analyse the precise nature of Mr Wilson’s entitlement. The FTT concluded that whilst Mr Wilson’s entitlement to remuneration by way of First Charge would not be scaled down in the event that there were insufficient profits to pay the first charges of all the members, in the event that the LLP made a loss Mr Wilson would have no entitlement to remuneration. Ms Murray challenges that conclusion and says that it is wrongly based on the label “First Charge”.

We are satisfied that the FTT was correct to construe Mr Wilson’s entitlement to a First Charge in the way it did. We have quoted above the terms of clause 3 of the Deed of Variation which sets out, under the heading “Profit Share”, Mr Wilson’s entitlement to a First Charge of £180,000 adjusted for the matters in the following sub-paragraphs. In particular that sum is reduced if Mr Wilson had less than £400,000 in chargeable time in the accounting year, is increased for car expenses and tax payable on earnings of the firm, and also increased to reflect 25% of the profits arising from international tax work.

The significance of amounts being payable to members by way of First Charge and the significance of LLP losses appears in the LLP Agreement. In particular, clauses 20 and 21 of the LLP Agreement provide as follows:

Schedule 4 of the LLP Agreement set out details of the Members’ First Charges for the purposes of Clause 20. Various figures were given for Members between nil and £228,000. Mr Wilson’s First Charge and that of one other Client Member was expressed to be “in accordance with deed of variation”. 100% of the share of profits after deduction of Members’ First Charges was allocated to the Management Members, although for the four Client Members the share was expressed to be “in accordance with deeds of variation”.

It is clear to us that the fact Mr Wilson’s entitlement was described as a First Charge in the Deed of Variation brought it within clause 20 of the LLP Agreement. Clause 20.1.1(b) and clause 21 did not apply to Mr Wilson and Mr Wilson was not entitled to a vote pursuant to clauses 20.1.3 and 20.2. The FTT acknowledged that these clauses did not apply to Mr Wilson. However, the FTT properly addressed its mind to the position if the LLP made a loss in any accounting year, and whether Mr Wilson would still be entitled to his remuneration as set out in the Deed of Variation. It concluded that he would not be so entitled:

We consider that is the correct construction of the LLP Agreement as varied by the Deed of Variation. If Mr Wilson was simply entitled to his remuneration regardless of whether the LLP made a profit or a loss in any particular accounting year then the Deed of Variation could easily say so in straightforward terms. It does not. Indeed, the parties went out of their way to define Mr Wilson’s entitlement as a “First Charge” and to retain the bulk of clause 20 of the LLP Agreement. Once a Member’s entitlement to remuneration is described as a “first charge”, the question immediately arises as to what it is charged upon. The answer to that is clearly that it is a charge on the profits of the LLP and implicitly it is only payable if there are profits out of which it can be paid. This construction of the LLP Agreement does not amount to relying on a label. It is simply giving the words their natural and ordinary meaning.

That is sufficient to deal with the challenge under Ground 3. The Court of Appeal in Tiffin described a finding as to the existence of a partnership as a finding of fact, albeit one requiring a recognition of the applicable legal principles. The FTT must be taken to have found as a fact that there was a partnership.

It is not clear to us that Mr Wilson has permission to challenge the FTT’s finding that there was a partnership other than by reference to the argument that the FTT relied on labels rather than the substance of the agreements. As Ms Vicary points out, there is no challenge to the FTT’s finding by reference to the criteria in Edwards v Bairstow [1956] AC 14. Further, to the extent that the FTT’s conclusion was an evaluative exercise based on its findings of primary fact, this tribunal should be slow to interfere with such a conclusion (see for example Fage v Chobani UK Limited [2014] EWCA Civ 5 at [114] and Proctor & Gamble UK Limited v HM Revenue & Customs [2009] EWCA Civ 407 at [9]).

However, we are conscious that the FTT only gave brief reasons for concluding that Mr Wilson was in substance a partner. In the circumstances, and notwithstanding what appears to be the limited basis on which permission was granted, we shall deal with Ms Murray’s other criticisms of the Decision and say why we consider that the FTT was entitled to reach that conclusion.

Ms Murray submitted that the FTT ought to have first applied the well-known line of authorities commencing with Ready Mixed Concrete which distinguish a contract of service or employment from a contract for services or self-employment. She relied on s 2(1) SSCBA 1992 which defines a “self-employed earner” as someone who is gainfully employed otherwise than in an employed earner’s employment, and an “employed earner” as someone who is employed under a contract of service. She submitted that the logical starting point is therefore whether Mr Wilson was employed under a contract of service. If he was, then he was an employed earner and could not be a self-employed earner. Ms Murray also submitted that s 15(3A) SSCBA 1992 requires one to assume that the LLP is a partnership, and then ask whether Mr Wilson was an employed earner or a partner in the hypothetical partnership.

We do not accept that is the right approach to the issue on this appeal. Section 4(4) LLPA 2000 provides that a member of an LLP shall not be regarded for any purpose as employed by the LLP unless, if the other members were partners in a partnership he would be regarded as a partner rather than an employee. The first question therefore is whether Mr Wilson would be a partner in that notional partnership. If he were not a partner, then he might be providing services to the LLP either as an employee of the LLP or pursuant to a contract for services with the LLP. However, that question is not relevant to the issues on this appeal.

This approach is clearly supported by the Court of Appeal in Tiffin, the authority relied upon by Mr Wilson. Rimer LJ described the approach required by s 4(4) LLPA 2000 as follows:

It was on this basis that the Court of Appeal in Tiffin focussed on whether Mr Tiffin would have been a partner. It found that he would have been a partner and therefore it did not need to consider the question of whether he would have been an employee.

Further, as we have noted above s15 SSCBA 1992 does not provide for Class 4 contributions to be payable by self-employed earners. It provides for them to be payable by members of an LLP who would be charged to income tax in respect of profits arising from the carrying on of a trade or profession by the LLP. In those circumstances, Class 4 contributions are payable by that member if they would be payable were the trade or profession carried on in partnership by the members. The parties and the FTT have treated the test under s 2(1) SSCBA 1992 for self- employed earners and the test under s15 SSCBA 1992 for liability to Class 4 contributions as the same test.

The first question therefore, is whether Mr Wilson would have been a partner, together with the other members of the LLP in the notional partnership described by s 4(4) LLPA 2000. As such, the FTT was right not to embark upon an analysis as to whether Mr Wilson was an employee of the LLP or providing his services pursuant to a contract for services.

In considering whether Mr Wilson would be a partner in the hypothetical partnership, the FTT did not refer to the definition of partnership in the Partnership Act 1890 (“PA 1890”) or the rules in that Act for determining the existence of a partnership. Those provisions really ought to have been the starting point for the FTT. However, it did refer to the analysis of the Court of Appeal in Tiffin and of Megarry J in Stekel v Ellice and we bear in mind that the FTT engaged in this analysis for the sake of completeness given its findings at [181(1)] and [181(2)]. As a result, it appears to have set out its reasoning quite briefly.

Ms Murray submits that the FTT failed to give due regard to the matters which pointed towards Mr Wilson not being a partner:

The definition of a partnership appears in s 1 PA 1890, with s 2 then setting out various rules to which regard must be had in determining the existence of a partnership:

In Stekel v Ellice, Megarry J found that the plaintiff who was described as a salaried partner was on the facts of the case in partnership with the defendant. The finding was made despite the fact that the plaintiff made no contribution to capital, the capital belonged solely to the defendant and all the profits belonged to the defendant. However, the nature of the agreement and the conduct of the parties accorded with the concept of partnership. The absence of a share of profits did not outweigh the other evidence of partnership.

Tiffin also concerned a salaried partner in a firm which later converted to an LLP. The Court of Appeal held that it was obvious from a reading of the members’ agreement that the parties intended to set up a relationship which could fairly be regarded as a partnership. The case was more clear-cut than Stekel v Ellice. The claimant made a capital contribution to the partnership, was entitled to share in surplus assets on a winding up, had a fixed share of profits to be taken as monthly drawings together with a further share of profits and a voice in the management of the firm.

Rimer LJ also referred to the decision in M Young Legal Associates Ltd v Zahid [2006] 1 WLR 2562. In that case, the Court of Appeal rejected arguments that it was a condition of partnership that each partner must be entitled to participate in the profits of the business. Further, whilst an interest in the capital of the firm or a dominant (in the sense of influential, material or significant) role in the management of the firm might be a strong indicator of partnership, they were not pre-requisites.

Ms Murray submitted that there was no sense in which Mr Wilson was carrying on a business in common with the other members of the LLP. He was subservient to them in every respect.

We do not accept that submission. We are satisfied that the FTT was entitled to find that Mr Wilson was in substance a partner in the notional partnership postulated by section 4(4) LLPA 2000 and for the purposes of s15(3A) SSCBA 2002. In particular:

We acknowledge that the LLP Agreement enabled the other Members to amend the LLP Agreement without Mr Wilson’s consent and Mr Wilson was not entitled to vote on any proposed amendments. However, that does not cause us to view Mr Wilson’s relationship with the partnership in a different light. His rights and obligations existed at all times during the period relevant to this appeal and it is not suggested that they were ever varied in that period.

Ms Murray relied upon Cobbetts LLP v Hodge [2009] EWHC 786. In that case, Mr Hodge was an “employed partner”. As such, he had significant autonomy in his work and was paid a salary plus a commission based on newly introduced business. He was not entitled to share in net profits, attend partners’ meetings or take part in the management or conduct of the partnership business. He was entitled to attend partners’ meetings and was held out as a partner to third parties. He was also required to observe the provisions of the partnership deed, although if he was not a partner there were no provisions to observe.

Floyd J held that Mr Hodge was not a partner for reasons given at [87]:

Ms Murray submitted that Mr Wilson’s position was analogous to that of Mr Hodge in Cobbetts LLP. We do not find factual comparisons between cases helpful. No two cases are the same and once the correct legal principles are applied an evaluative judgment is required to determine whether the relevant individual is a partner.

Finally, Ms Murray submitted that the FTT was wrong to find and rely on the intention of the parties for Mr Wilson not to be an employee. We can see that the FTT did find at [29], quoted above that Mr Wilson had said in negotiations that he wanted to be a partner and not an employee. However, we cannot identify any part of the Decision in which the FTT places reliance on the expressed intentions of the parties. Its analysis was based on the effect of the legal agreements.

In our view, the FTT was entitled to find that Mr Wilson was a partner in the sense that he was carrying on a business in common with the other Members of the LLP with a view of profit. Looking at the facts as a whole, we would have reached the same conclusion.

For the reasons given above, we are satisfied that the FTT made no error of law as alleged in Ground 3 and we dismiss this appeal.